The ADP National Employment Report showed private payroll growth slowed in May, signaling a cooling of the labor market. RSM Chief Economist Joe Brusuelas joins Market Domination Overtime to break down the print and what it could mean for the Federal Reserve's next interest rate move.

"Look, this is just solid, but not spectacular. I'd like to see wage growth slow a bit, but we're really doing quite well," Brusuelas says of the report. He points to the May ISM Services PMI, which topped expectations, as a positive economic indicator, explaining, "The upper 20% of the population of households is responsible for 50% of spending. Every three months or so they're going to hit the accelerator. You're going to get a good number in retail sales, personal spending, or the ISM Services. That's why the economy is just going to continue to chug along I think at that 2% rate over time." However, he notes that there are still issues out there, like a deceleration in durables spending due to high finance costs.

He adds that the economy is normalizing, and predicts a cool summer ahead.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Melanie Riehl

Video Transcript

Let's bring it back to the economic data that we're looking at this week.

Um, ad P is surprise is always this morning, but we're looking ahead to Friday.

Um And I haven't seen an expectation for a negative print in forever and that would be an extreme outlier.

But the, the strength that we've had, um I don't even know what we're averaging, but it's gotta be 100 and 50,000, 200,000.

A little bit more than that actually.

Yeah.

But yeah, yeah, we're gonna get, we're gonna get another good status quo like number we think 200,000 on the top line total increase in, in, in employment 3.8% on unemployment, 0.3% month, over month gain in average hourly earnings translates to 3.9.

Look, this is just solid but not spectacular.

I'd like to see wage growth slow a bit, but we're really doing quite well.

So what's too good?

What's too spectacular that the market says, oops 300,000 or greater.

That's where we're, we're either we've got a problem in collection of the data we're under sampling and overstating or the economy is re accelerated now.

It, it doesn't look that way to me based off the other real time data.

Sure.

The M SI SM services were good today.

You know why that is and everyone, everybody out there get used to this.

The upper 20% of the population of households is responsible for 50% of spending every three months there or so.

They're gonna hit the accelerator.

You're gonna get a good number in retail sales, personal spending or the ISM services, right?

That's why the economy is just gonna continue to chug along.

I think at that 2% rate over time.

Now that doesn't, there aren't issues out there.

We've clearly seen deceleration in spending on durables.

Why?

Because of elevated finance cost?

Look, we're at that point now where we're getting a little bit further away from the, the trough and the pandemic where everybody who could took advantage of those zero rates and replace worn out stock by that.

I mean, gerbils meant to last more than a couple of years.

Washing machines, dryers, you know, boring things like dishwashers, right?

You move away from that.

Well, things wore out, you have to go and replace it, but it's not 0%.

Now, it's gonna be at 357 or, or higher depending on your credit scores, right.

People are rightly upset and we understand some households are really having a hard time dealing with that price shock, good talking points.

We should always acknowledge the risks around the outlook.

But does it mean the economy is slowing into a risky category?

It does not.

So does that still mean?

I mean, it feels like the soft landing narrative has been less assured as of late, but it sounds like you still think so.

Soft landings in the rearview mirror, we're in a business extended business expansion.

We're just slowing back to trend, which is a good thing.

It's what you want.

So we can begin to talk about the fed, bringing down the ECB tomorrow too.

Yeah.

Yeah.

Ok.

So, yeah, tomorrow we're gonna get the other big gorilla in the room.

The ECB is gonna cut rates by 25 basis points.

Look, we think that's the first of four.

This year we get one in September, October, then December from the ECB because they've slowed.

We had the BOC today, right.

They cut rates like 2022.

They led the pack now in, in Canada, they've had zero growth for nine months.

The unemployment rates have been going up.

It would have been a policy here not to cut rates there.

They've got a sufficient disinflation in train to get them back to the 2% target.

The ECB, they're gonna overshoot to the underside on 2%.

Right.

But the US is gonna be a little bit longer.

We're not gonna cut, I think until September, the risk is the economy continues to outperform a bit and it doesn't happen until December.

What does that mean divergence between the central banks?

The dollar is going to get stronger and it's appropriate that it should because we are outperforming our G7 peers.

What happens historically, when the central banks around the world get a little bit out of step, somebody's got a lead, you know, and there's always gonna be an outliner.

So central bank divergence results in financial market volatility specifically in foreign currencies.

Typically it's emerging markets that pay the price.

You saw what happened in the loony today.

You'll see a similar reaction function in the euro going forward.

Now, my sense is we'll always overreact in the near term.

But as we continue to see the economy cool.

My theme is it's gonna be a cool, cool summer.

I can't wait.

I'm in a turtleneck here.

The economy is the economy cools and hiring cools, but we're just normalizing.

That's really, I think the important message here too many times we get lost, swinging between zero and one red light, green light.

I don't think that's appropriate for the context in which we're, we're so not a cruel, cruel summer.

A cool, cool, cool, cool.

I'm glad the song.

That's right.

I'm glad you remember that.

It took me a minute.

I'm like, wait is the song cool of the UK band from when we were all chill out again from back in the day.

We will, we will spare people our pipes.

But thanks.

So much.

I appreciate it.

Great to see you always.