Sluggish activity in US services sector and slowing hiring reveal negative impact of tariffs

For the first time in almost a year, business activity in the US services sector unexpectedly declined last month, while companies cut back on hiring. This indicates mounting pressure on the economy due to tariff increases.

The ISM Purchasing Managers' Index (PMI) for the services sector dropped 1.7 points to 49.9 in May, just below the key 50-point mark. At the same time, the ADP Research report shows that the number of jobs in the private sector grew by only 37,000 last month, which is a two-year low.

Treasury bonds rose on speculation over a possible interest rate cut by the Federal Reserve (Fed) this year in light of these two reports.

ISM and ADP data released on Wednesday, June 4, highlight concerns about Trump's rapidly changing trade policies. The steepest contraction in new orders and the highest prices-paid index since late 2022 reveal the detrimental impact of US import tariffs on demand and inflation.

The US economy has remained resilient this year, while inflation continues to exceed the Fed's 2% target. These are the main arguments put forward by Fed officials in favor of keeping rates unchanged until the impact of tariffs on the economy has been thoroughly assessed.