US Strategy Weekly: World Bank Lore

The World Bank is the latest entity to lower its global economic forecast stating that “downside risks to the outlook predominate, including an escalation of trade barriers, persistent policy uncertainty, rising geopolitical tensions, and an increased incidence of extreme climate events.” The report focused on “erratic trade policies” and indicated that higher tariffs posed a significant headwind for nearly all economies. And while the World Bank stopped short of forecasting an outright recession this year, it wrote that global economic growth this year would be the weakest since 2008. Moreover, in 2026 and 2027, the Bank expects a “tepid recovery” averaging just 2.5%, the slowest pace of any decade since the 1960s.

What was not explained in the report was that the European economies, with the exception of Ireland, have been already been suffering from extremely sluggish growth. Seasonally adjusted GDP increased by 1.6% in the Eurozone in the first quarter of 2025 (its best pace since the fourth quarter of 2022), after growing 1.4% in the fourth quarter of 2024. In short, tariffs could weaken the Eurozone further if negotiations fail, but the EU economies have been frail for more than two years. A good trade deal could potentially boost trade with the US; however, negotiating a trade deal with the EU is likely to be far more difficult and filled with pitfalls than dealing with the UK. Therefore, US-EU negotiations could drag on and remain uncertain for much of this year.

To the extent that current tariffs are impacting China’s exports to the US, China’s economic activity could decline, however China’s economy grew 5.4% year-on-year in the first quarter of this year, maintaining the same pace it did in the fourth quarter, and exceeding market expectations of 5.1%. Thanks to ongoing stimulus, China’s economy remains at its strongest annual growth rate in 1-1/2 years. We doubt that this stimulus will change, and it would most likely increase if China’s economy slowed.

As for the US economy, the biggest uncertainty is not tariffs, but whether Congress will pass the “Big Beautiful Bill.” The administration wants it passed before the July 4^th recess and that may be difficult to achieve. But it is expected to be retroactive, and if so, it would provide important stimulus to the US economy. It appears that the administration is attempting to offset growing deficits by growing the economy. This is a dangerous strategy, but by increasing the denominator faster than the numerator, the deficit-to-GDP ratio will decline, and this could appease the bond market.

It is unfortunate that The World Bank does not mention the massive increase in global sovereign debt as a major financial and economic risk. Bankers understand that debt is an important factor for global growth since big debt burdens are deterrents to growth. But in reality, The World Bank is not really a bank. Its mission is “to reduce the share of the global population living in extreme poverty to 3% by 2030.” In other words, it is not an entity run by bankers or economists, which helps explain its forecast and, in our opinion, means its global economic forecasts lack in rigor.

Recent economic releases for the US were mixed, and the May employment report is a good example. Despite the fact that May’s payrolls increased by a larger than expected 139,000 jobs, March and April’s reports were simultaneously revised lower by a total of 95,000 jobs. The unemployment rate was unchanged at 4.2%, but only because the labor force (the sum of those employed and unemployed) decreased. The number of people employed actually fell by a substantial 696,000 while the number of unemployed rose by 71,000 in May. However, the broader U6 unemployment rate was also unchanged in May at 7.8%. Both the participation rate and employment population ratio decreased modestly in May; but again, this was due to the household survey showing a decrease of 696,000 employed. Nevertheless, the establishment and household surveys showed job growth of 1.1% YOY and 1.3% YOY, respectively. These rates fell below their respective long-term averages, but more importantly, they remain positive. See page 3.

Although May’s job growth of 139,000 was lower than the 147,000 jobs created in April, the 3-month moving average of newly employed rose from 123,000 to 135,330. In short, the economy is demonstrating a stable and steady uptrend in job growth. Another sign of a good job market was the decline in discouraged workers, which fell from 422,000 to 352,000 in May. This was the lowest level of discouraged workers since August 2024 and is down from a high of 630,000 in January of this year. See page 4. In addition, average hourly earnings and average weekly earnings both rose 4.0% YOY in May, in line with the pace seen over the last seven months.

Two major factors that impact household finances are inflation and unemployment. The sum of these two factors has been called the Misery Index and in May this was unchanged at 6.5%, which is just above the 5.7% level that is rarely reached but is considered extremely favorable. Note that April’s inflation rate was 2.3% and May’s CPI will be reported this week. Historically there has been a strong correlation between the 3-month average of job growth and consumer confidence. But as seen on page 5, this relationship broke down in 2020 during the pandemic and sentiment has remained substantially more negative than employment data ever since.

The ISM nonmanufacturing index fell from 51.6 to 49.9 in May, the first contraction seen since June 2024. The drop was due in large part to a decline in business activity, which fell to the neutral level of 50 and new orders contracted for the first time since June 2024. The employment index expanded after two months of contraction. Firms are citing long-term policy uncertainty as a primary source of concern, adversely impacting hiring and purchases. The ISM manufacturing survey was reported last week, and it edged 0.2 lower in May to 48.5. Imports fell to 39.7, the lowest since March 2009, and exports declined to 40.1, the lowest since May 2020. These numbers were unusually low; however, it was due to businesses building inventories ahead of April’s tariffs, and we expect these extremes will be temporary. See page 6.

The Small Business Optimism Index increased 3 points in May to 98.8, moving slightly above the 51-year average of 98. Of the 10 components, seven increased, two decreased, and one was unchanged. The Uncertainty Index rose 2 points from April to 94. Expected business conditions and sales expectations contributed the greatest to the rise in the Optimism Index. Note that actual earnings and sales polled lower in May, but expectations for economic improvement, real sales and credit conditions moved higher. Most importantly, the March/April decline in business confidence has been erased. See page 7.

Consumer credit outstanding increased by $17.9 billion in April, an increase from March’s downwardly revised $8.6 billion increase. Non-revolving credit which includes auto and student loans, grew by $10.2 billion, a 3.4% annualized rate. Revolving credit, which includes credit cards and other short-term borrowing, increased by $7.6 billion, an annualized rate of 7.2%. This marks a clear acceleration from the 4% average pace in 2024. In sum, revolving consumer credit grew on a monthly basis for the first time in five months and non-revolving credit grew month-to-month for the first time in three months. This is good news. See page 8.   Technical indicators continue to be solidly bullish. The 25-day up/down volume oscillator is at 2.37 this week, neutral, but moving back toward overbought territory. This indicator was already overbought for 9 of eleven days in May, which was sufficient to confirm a new cyclical or all-time high in the equity indices. And the fact that this oscillator never reached oversold at the April 2025 low suggests that the current advance is a continuation of a longer-term bull market cycle. In addition, the NYSE cumulative advance/decline line hit a record high on June 10, 2025, another confirmation of new highs in the indices. It is unusual for the oscillator to reach overbought territory or the advance/decline line to hit new record highs prior to the equity market making a new cyclical high in price Typically, we wait for these indicators to confirm a new high in the S&P 500 index. Nevertheless, the strength seen in technical indicators shows that there is solid volume and breadth supporting the equity market and this implies equities will move higher. We have been expecting the market to find a ceiling at the recent highs until Congress passes the “One Big Beautiful Bill Act” and second quarter earnings season begins. However, both are only a few weeks away.

Gail Dudack

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