U.S. Growth Expectations Slow Even as Markets Climb 
The U.S. stock market dropped nearly 23% from its February peak to the low on April 8. Since then, it has rebounded, closing out May up 0.5% year-to-date. But I worry markets appear to have moved ahead of economic fundamentals. At the start of 2025, U.S. GDP growth was projected at 2.2%, but expectations have since fallen to 1.2%. While incoming data year-to-date has been solid, and in some areas surprisingly strong, growth projections continue to weaken. Markets, however, seem to be discounting these lower expectations so either the market is out over its skis or the outlook for the economy will need to improve materially. 

Part of the disconnect between market optimism and weakening economic data may stem from firms pulling forward activity in anticipation of future uncertainty. Businesses, concerned about potential tariffs, tighter credit conditions, or softening demand, may have accelerated production earlier in the year. This front-loading has temporarily boost headline figures, masking underlying weakness that could become more apparent in the second half of the year. Equity markets are pricing in more optimism than the economic outlook supports. 

The Federal Reserve has remained sidelined, largely due to concerns about tariff-induced inflation. At the beginning of the year, markets expected four rate cuts in 2025. That’s now down to two, likely in September and December. The next update from the Fed arrives June 18, when revised FOMC projections will likely show lower real GDP growth, slightly higher inflation expectations, and a relatively unchanged unemployment outlook. 

Inflation is moderating, offering some relief to policymakers and consumers. In April, headline inflation rose 2.1% year-over-year, while core inflation, which excludes the more volatile categories of food and energy, increased 2.5%. These are the lowest annual price gains since early 2021, suggesting that price pressures are cooling after a prolonged period of elevated inflation. While still above the Federal Reserve’s 2% target, the downward trend supports the case for potential rate cuts later this year. 

At the same time, other parts of the economy continue to show signs of strain. Manufacturing remains weak, with the ISM Manufacturing PMI falling to 48.7 in April, signaling contraction for the second straight month. Production dropped sharply to 44. Notably, the New Export Orders Index posted its steepest decline since the onset of the pandemic

Consumers are growing more cautious. The personal saving rate rose 0.6 percentage points to 4.9%, suggesting households are setting aside more income rather than spending it. 

At the same time, recession odds over the next 12 months remain around 30%, not excessively high, but far from zero. The labor market continues to be a key area to watch, and May’s employment report, due later this week, will offer important insight into whether job growth is holding steady or beginning to cool.

Meanwhile, the advance report on trade and inventories showed a sharp narrowing of the trade deficit in April, as importers recalibrated shipments to better match domestic demand. If sustained, this realignment could provide a modest boost to second-quarter real GDP growth and temporarily mask some of the broader economic softness. 

Mixed Signals in Europe: Sentiment Improves as Trade Risks Rise 
In the eurozone, the picture remains mixed. While the manufacturing PMI declined in May, the European Commission’s economic sentiment indicator ticked up from 93.8 to 94.8, driven by improved consumer outlook and a slight rebound in industry sentiment. The eurozone's manufacturing sector is showing early signs of stabilization. In May 2025, the HCOB Eurozone Manufacturing PMI rose to 49.4 from 49.0 in April, its highest level in 33 months. While still below the 50.0 threshold that signals expansion, the improvement reflects rising orders, falling inventories, and increasing output, pointing to the slowest pace of contraction since August 2022.

The European Central Bank (ECB) is expected to cut rates by 25 basis points in June. Faster-than-expected disinflation, driven by a stronger euro, falling oil prices, and global trade uncertainty, has created room for what’s being framed as an “insurance” cut. 

However, trade tensions could complicate the picture. President Trump has threatened a 50% tariff on EU goods, reigniting fears of a transatlantic trade war. The EU has responded with a €50 billion trade proposal including LNG and soybean purchases, zero tariffs on autos and industrial goods, and strategic cooperation in energy, AI, and digital infrastructure. The threat of trade escalation remains a key risk,

Asia: Caution Takes Hold 
In China, the official manufacturing PMI rose slightly to 49.5 in May, up from 49.0 in April. While the slower pace of contraction is encouraging, it still signals a shrinking manufacturing sector for the second consecutive month. 

Across ASEAN, five of the six largest economies have revised their 2025 growth projections downward this year. Sluggish global demand, tighter financial conditions, and a slow trade recovery have prompted a more cautious regional outlook. 

India remains a bright spot in an otherwise mixed global landscape. First-quarter GDP beat expectations, expanding at 6.8% year-over-year, reflecting strong domestic demand, robust investment activity, and resilience in key service sectors. The manufacturing Purchasing Managers’ Index (PMI) held firm at 57.4 in May, signaling continued strength in factory activity and suggesting that output, new orders, and job creation remain solid. This marks one of the longest sustained expansions in the index’s history, reinforcing India’s position as a manufacturing growth engine in Asia.