Key Points
- It seems likely that US-China trade tensions are escalating, with tariffs impacting global trade.
- Research suggests US GDP contracted by 0.3% in Q1 2025, driven by import surges.
- The evidence leans toward the Federal Reserve planning rate cuts in H2 2025 due to inflation.
- Global manufacturing activity is contracting, with April PMIs showing declines.
- There is controversy around tariff impacts, with some seeing revenue gains, others economic harm.
Economic Overview
The global economy in May 2025 is marked by significant trade tensions, particularly between the US and China, with tariffs and restrictions affecting trade flows. The US economy saw a GDP contraction in the first quarter, influenced by a surge in imports, while consumer sentiment remains low amid inflation concerns. The Federal Reserve is expected to cut rates later this year, and global manufacturing activity is contracting, signaling broader economic challenges.
Market Performance
Despite economic uncertainties, stock markets showed resilience, with the S&P 500 rising for four straight days by May 15, 2025, gaining 0.3%, while the Dow Jones rose 0.7%. However, the Nasdaq fell 0.2%, reflecting mixed investor sentiments.
Economic News Report for May 20, 2025
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Background and Market Context
The global economic landscape in May 2025 is characterized by significant trade tensions, particularly between the US and China, with tariffs and restrictions impacting trade flows. The US economy saw a GDP contraction in the first quarter, influenced by a surge in imports, while consumer sentiment remains low amid inflation concerns. The Federal Reserve is expected to cut rates later this year, and global manufacturing activity is contracting, signaling broader economic challenges.
US-China Trade War Escalation
The ongoing trade war between the US and China remains a dominant theme, with both countries imposing tariffs and restricting trade. Shipments from China to the US have significantly decreased, with the Port of Los Angeles reporting a 33% drop in arrivals for the week beginning May 4, and container bookings down 45% by mid-April, further declining to 25% in May (Deloitte Insights). The US has the upper hand due to S&P 500 companies generating substantial revenue from China (approximately 6 times the value of US exports to China, exceeding $1 trillion). However, China is retaliating with tariffs and export restrictions, adding to global economic uncertainty.
Treasury Secretary Bessent indicated that a trade agreement with China is near, with the US considering slashing tariffs to 50-60% (down from 145%). However, China demands complete cancellation of tariffs, highlighting ongoing negotiation challenges (Deloitte Insights).
US GDP Contraction
In the first quarter of 2025, the US real GDP contracted by 0.3% annualized, primarily driven by a 50.9% surge in imports, which reduced GDP growth by 4.8 percentage points. While consumer spending increased by 1.8%, durable goods spending fell by 3.4%, reflecting potential impacts of trade tensions and tariff-related uncertainties (Deloitte Insights).
Federal Reserve Policy
The Federal Reserve paused interest rate hikes, keeping rates unchanged due to higher inflation and weaker economic performance. The Fed anticipates multiple rate reductions in the second half of 2025, signaling concerns about economic growth and inflation pressures (Deloitte Insights).
Global Manufacturing Contraction
April Purchasing Managers’ Indexes (PMIs) indicated a contraction in global manufacturing activity, with the global PMI at 49.8 (down from 50.3). Regionally, the US PMI was 50.2, Mexico 44.8, Canada 45.3, the Eurozone 49.0, and Southeast Asia below 50.0, while China’s PMI was slightly above 50. Japan’s PMI remained negative, highlighting a broader slowdown in manufacturing (Deloitte Insights).
Low Consumer Sentiment
US consumer sentiment in April 2025 was at 52.2, a significant decline of 8.4% from March and 32.4% from the previous year. Consumers expect inflation to rise to 6.5% over the next 12 months, up from 5%, reflecting heightened economic uncertainty and potential price pressures from tariffs (Deloitte Insights).
Stock Market Performance
Despite economic uncertainties, stock markets showed resilience. The S&P 500 rose for the fourth straight day on May 15, 2025, gaining 0.3%, while the Dow Jones Industrial Average increased by 0.7%. However, the Nasdaq Composite fell 0.2%, snapping its winning streak, as investors digested earnings reports and key economic indicators, which were largely in line with expectations (Investopedia).
Tariffs and Revenue
A 10% tariff on all imports could generate $1.575 trillion in revenue over 10 years, while a 20% tariff could yield $791 billion. However, economists argue that the optimal tariff rate is zero, as tariffs can reduce other forms of tax revenue and harm economic growth (Deloitte Insights).
US-UK Trade Deal
An informal trade deal between the US and UK includes a 10% tariff on UK imports and a reduction of car tariffs to 10% for the first 100,000 cars (with 120,000 sold last year). This deal aims to balance trade while protecting domestic industries (Deloitte Insights).
IMF Global Forecast
The International Monetary Fund (IMF) revised its global growth forecast downward to 2.8% for 2025 (from 3.3%), with the US expected to grow at 1.8% (down from 2.7%). Other countries, including the UK (1.1%), Japan (0.6%), Canada (1.4%), and China (4%), also face reduced growth prospects due to trade tensions and tariff impacts (Deloitte Insights).
April US Employment
The US added 177,000 new jobs in April, with the unemployment rate at 4.2%. Hourly earnings increased by 3.8% year-over-year, and the U-6 measure of unemployment decreased to 7.8%, indicating a resilient labor market despite economic challenges (Deloitte Insights).
Beige Book Findings
The Federal Reserve’s Beige Book, released on April 23, 2025, highlighted pervasive uncertainty due to tariffs, with nonautomotive spending down, prices up modestly to moderately, and firms expecting cost increases, further underscoring the economic impact of trade policies (Deloitte Insights).
Conclusion
The economic news for May 20, 2025, underscores the significant impact of US-China trade tensions, with tariffs and restrictions affecting global trade, GDP, and consumer sentiment. The Federal Reserve’s anticipated rate cuts and the contraction in global manufacturing activity highlight the challenges facing the global economy, while stock market performance shows some resilience amid uncertainties.
Key Citations