May 2025
May was a tumultuous month, but not in the way it was expected to be. Since the chaotic implementation of the global tariffs by the Trump administration market participants had been waiting for the consequences, mainly the duality of rising inflation and rising unemployment. The expectation had been that the bad news would be fully felt, starting six weeks after the so-called liberation day, falling squarely in the month of May. Surprisingly, that bad news never arrived.
As far a headline grabbing news, the biggest of the month was the downgrade of U.S. debt from AAA to AA1. While the move was largely symbolic, it did cause some disruption in the market as investors digested what it meant for allocations, in that U.S. debt has long been considered risk free. Many in the media asked the rhetorical question “if U.S. debt is no longer AAA, then can it still be considered risk free?” As the U.S. dollar remains the world’s reserve currency, and the U.S. government retains the ability to collect tax revenue to repay its debt, the answer to that question is an obvious yes. However, the downgrade is a black eye to the government and its mismanagement of the economy going back to the turn of the century. As we closed out the dot-com era in 2000, the U.S. federal budget was in surplus, and the national debt was $5.7 trillion. By 2008, the year of the great recession, the annual budget deficit was a half-trillion in the red and the outstanding debt had risen to $9.8 trillion. Last year the budget was approximately $1.8 trillion in the red and the national debt had ballooned to $36 trillion for a debt to GDP ratio of approximately 120%. That ratio stood at 80% in 2008. It’s obvious why the credit rating of the government debt was downgraded. In fact, with such a rapid deterioration in credit metrics, one could ask why it isn’t on watch for further downgrade.
Despite fears of DOGE-related job cuts, the employment backdrop in May was better than expected. The May employment report showed jobs continued to grow in the U.S., albeit at a decidedly slower pace than last year. The non-farm payrolls for May showed a gain of 139,000, marginally better than the 126,000 expected, while the unemployment rate was unchanged at 4.2%. Earlier in the week, the JOLTS job opening report showed an uptick of nearly 400,000 unfilled jobs further fortifying the impression that employment continues to be strong.
The stock market rally that’s transpired over the last six weeks is likely reflected in the most recent University of Michigan surveys, with the current sentiment index rising to 52.2 from 51.5 and the 1-year inflation expectation falling from 7.1% to 6.6%. Both incremental improvements but paired with the rising stock prices are giving economists hope that a recession this year will be avoided.
Furthermore, the Consumer Price Index for May rose less than expected by 0.1%, well within the Federal Reserve’s inflation comfort range and should be enough to give the Fed cover when they ultimately decide to cut the overnight interest rate.
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