June 4, 2025

QuickTakes

Mixed Bag

The 10-year US Treasury bond yield fell to 4.36% today on a batch of weaker-than-expected economic indicators. Bond investors weren't fazed by Elon Musk's attack on President Trump's "big beautiful bill" on Tuesday afternoon. Musk thinks it’s ugly: "This massive, outrageous, pork-filled Congressional spending bill is a disgusting abomination." Nor were they fazed by the fact that the Congressional Budget Office said today that the bill (as passed by the House) could add $2.4 trillion to the federal budget deficit over the next 10 years. The Committee for a Responsible Federal Budget reiterated that the bill will more likely increase federal government debt by $3 trillion, or roughly $5 trillion if made permanent. The Trump administration counters that better-than-expected economic growth will bring in more revenues.

The bond market apparently isn't on the verge of a debt crisis, as widely feared just a few days ago. Instead, investors bought US Treasuries today in response to weaker-than-expected reports from ADP on private payrolls and ISM on nonmanufacturing business activity. Nevertheless, they didn't shake our confidence in the resilience of the economy, as we discussed again yesterday. Consider the following:

(1) ADP payroll report. While ADP’s private payrolls series does track the Bureau of Labor Statistics’ (BLS) private payrolls, it doesn't track monthly changes in the latter very well (chart).

Given the strength of other employment indicators, we doubt that private payrolls rose just 37,000 in May (chart). We still expect a May gain exceeding 100,000 in the BLS series, which will be reported on Friday. We also expect a significant upward revision in April's BLS gain, as we explained yesterday.

We note that monthly business applications remained very strong at 449,510 during April (chart). That's impressive considering the drop in the stock market as well as the weakness in consumer and business confidence surveys during April on terrifying tariff fears.

(2) ISM purchasing managers reports. The drop in the ISM's national NM-PMI, to 49.9 (indicating a contraction of the non-manufacturing, or services, sector, since it dipped below 50.0) also challenges the economy's resilience (chart). The new orders subindex fell to 46.4. The employment subindex was relatively weak at 50.7. That's unsettling since the services economy has accounted for most of the strength in the labor market all year. Also weak last month was the ISM's national M-PMI, for manufacturing industries, at 49.9.

Then again, the S&P Global measures of both the M-PMI and NM-PMI strengthened in May to solid readings of 53.7 and 52.0 (chart). Go figure!

Yesterday, we observed that the weak ISM national M-PMI has been a misleading indicator of the solid growth rate of goods in the real GDP calculation over the past three years. The NM-PMI has been a better indicator of the growth rate of services in real GDP (chart). However, the weak reading for May's NM-PMI doesn't jibe with the AtlantaFed's current GDPNow estimate showing a robust 3.2% (saar) increase in real personal consumption expenditures on services.

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