Fed Holds Rates Steady as Services Rebound, Consumer Credit Rises, and Productivity Declines in Q1
Weekly Economic Review: May 9, 2025
Service activity improved unexpectedly in April, although prices rose and fewer industries reported growth; consumer credit rose, driven by increases in auto loans, student loans, and credit card balances; the FOMC held rates steady, as expected; and labor productivity declined in the first quarter.
It was a relatively quiet week for economic data releases, starting with reports on service sector activities. The service sector’s performance in April improved after a decline in March, surpassing market expectations and indicating expansion.
Consumer credit, excluding mortgages, increased in March by the most in three months, bouncing back from a decline in February. The rebound was primarily driven by increases in auto loans, student loans, and credit card balances.
The Federal Open Market Committee (FOMC) once again decided to keep interest rates un-changed, marking the third consecutive meeting with no changes. Despite maintaining a relatively positive outlook on economic conditions, the Fed expressed concerns about the risks of higher inflation and rising unemployment due to tariffs. Fed Chair Powell emphasized that the Fed will not consider lowering rates until there is greater clarity on the direction of trade policy.
Labor productivity declined in the first quarter for the first time since the second quarter of 2022, primarily due to a decrease in business output and an increase in hours worked.
Let’s examine in more detail the Institute for Supply Management (ISM) Report on Business Services Sectors, the consumer credit, the FOMC meeting and the productivity and costs data announced last week.
Consumer Confidence:The Conference Board reported that its Consumer Confidence Index, which gauges consumers’ views and expectations regarding business conditions, income, and the labor market, fell by 7.9 points in April to 86.0, lower than anticipated and its lowest point in nearly five years, This decline was widespread across all age groups and most income brackets, particularly among consumers aged 35 to 55 and those earning over $125,000 annually.
Short-term expectations for income, business, and labor market conditions, as measured by the Expectations Index, dropped significantly by 12.5 points to 55.4 and reached their lowest level since October 2011. The April figure is well below the recession-indicating threshold of 80. The proportion of consumers expecting fewer jobs in the next six months reached its highest level since April 2009, during the Great Recession. Future income expectations turned negative for the first time in five years, reflecting growing concerns about personal financial situations.
Perceptions of the current labor market weakened, with the labor market differential (views on whether jobs are plentiful or hard to get – a key metric for assessing labor market strength) de-creasing to 15.1 from 17.5 in February. A higher share of consumers now expects a stock market decline over the next 12 months, the largest since October 2011, with an average anticipated de-cline of 7%, the highest since November 2022. Concerns about the impact of tariffs have reached an all-time high, and the negative effects of these concerns on the economy are also rising.
Consumers’ assessments of their family’s future financial situation have significantly weakened, and the share of consumers expecting a recession in the next 12 months has increased to a two-year high. Plans for purchasing homes, cars, and vacations have decreased, along with plans for big-ticket items like appliances and electronics. Consumers also intend to reduce spending on services, affecting nearly all service categories.
JOLTS:The Bureau of Labor Statistics (BLS) reported a decrease of 288,000 job openings in March, bring-ing the total to 7.19 million, down from a revised 7.48 million (initially 7.57 million) in February. The lower job openings likely reflect weaker labor demand due to economic uncertainty. This figure fell short of the market expectation of 7.50 million. Year-over-year, job openings declined by 901,000. The monthly drop was widespread, with significant losses in transportation, warehousing, and utilities (59,000), accommodation and food services (42,000), real estate and rental and leasing (39,000), construction (38,000), health care and social assistance (37,000), federal government (36,000), and state and local government (24,000). All four regions experienced declines in job openings.
The ratio of job openings to unemployed individuals, a key metric monitored by the Fed to gauge the balance between labor demand and supply. decreased to 1.0 in March from 1.1 in February. Meanwhile, the number of hires rose by 41,000 to 5.41 million in March, up from 5.37 million in February. The increase in hires was primarily driven by gains in accommodation and food services (50,000), health care and social assistance (31,000), and finance and insurance (24,000), which were partially offset by losses in construction (45,000), professional and business services (43,000), and wholesale trade (13,000). The South was the only region to post a decline in hires in March. On an annual basis, hires decreased by 61,000.
Layoffs dropped by 222,000 to 1.56 million in March, following an increase of 106,000 to 1.78 mil-lion (revised down from 1.79 million) in February, which was below the market expectation of 1.81 million. Layoffs increased by 109,000 over the year. The monthly decrease in layoffs was broad-based, driven by reductions in accommodation and food services (77,000), retail trade (66,000), health care and social assistance (34,000), and professional and business services (32,000). The Northeast, South, and Midwest saw decreases in layoffs, while the West experienced a slight in-crease.
The number of voluntary resignations rose by 82,000 to 3.33 million in March, after a decrease of 6,000 in February to 3.25 million (revised up from 3.19 million). The March figure exceeded the market expectation of 3.19 million. Year-over-year, quits increased slightly by 3,000. The quits rate, which measures the rate at which workers voluntarily leave their jobs, excluding retirements, increased to 2.1 in March from 2.0 in February.
ISM Report On Business Services Sectors:The Institute of Supply Management (ISM) released its April report on economic activity for the service sectors, which constitute 70% of the private economy in terms of both employment and GDP. The data suggests that the service sector is resilient, even as the manufacturing sector faces contraction due to tariffs. The ISM services index, which measures the economic health of the service sector, registered at 51.6, an increase of 0.8 points from March’s reading of 50.8. This marks the 56th time in 59 months that the sector has expanded since the recovery from the pandemic recession began in June 2020. An index reading above 50 indicates growth in the services sector. The April figure surpassed market expectations of 50.2.
Prices paid for materials and services increased in April to their highest level in more than two years, with nearly 40% of purchasing managers reporting higher prices, the highest share since November 2022. The prices index came in at 65.1, a 4.2-point increase from March’s reading of 60.9, surpassing market expectations of 61.4.
The ISM’s business activity index, comparable to factory production, fell by 2.2 points to 53.7 in April from 55.9 in the previous month, ending a string of fifty-nine consecutive months of expansion. Eleven industries reported growth in April, led by accommodation and food services, whole-sale trade, mining, and real estate, while six industries experienced contraction.
The new orders index, a forward-looking indicator, rose by 1.9 points to 52.3 from 50.4 in March, exceeding market expectations of 50.3. The employment index increased by 2.8 points to 49.0 from 46.2 in the prior month, remaining in contraction territory for the second consecutive month. The April figure was higher than the market expectation of 47.1. The supplier deliveries index rose to 51.3, 0.7 points higher than March’s reading of 50.6, marking the fifth consecutive month of expansion.
Consumer Credit:The Federal Reserve released its G.19 Consumer Credit report, a monthly statistical release that provides detailed information on consumer credit outstanding. This report breaks down credit into revolving credit (e.g., credit cards) and nonrevolving credit (e.g., auto, student, and personal loans), and includes changes in credit terms such as interest rates and loan maturities. It focuses on credit extended to individuals for personal, family, and household expenditures, excluding loans secured by real estate (e.g., residential mortgages).
In March, consumer credit increased by $10.17 billion (2.4%), rebounding from a decline of $614 billion (revised down from $810 billion) in the previous month. This increase exceeded market expectations of $9.39 billion, and was primarily driven by rises in both nonrevolving credit ($8.26 billion or 2.7%) and revolving credit ($1.91 billion or 1.7%). Last week’s report on consumer spend-ing indicated that consumers likely accelerated their purchases of goods such as cars in anticipation of higher prices due to tariffs. This week’s report on consumer credit suggests that the surge in purchasing gave rise to additional consumer borrowing. Additionally, the increased consumer credit indicates that the first quarter’s healthy consumer spending was at least partially fueled by the rise in consumer credit and a decrease in personal savings.
On a quarterly basis, consumer credit grew by 1.5% to $5.01 trillion in the first quarter of 2025. Revolving credit increased by 2.3% ($1.32 trillion), while nonrevolving credit rose by 1.2% ($3.68 trillion).
FOMC Meeting:The FOMC voted unanimously to keep its benchmark rate steady, targeting a range of 4.25% to 4.5%. The committee highlighted increased uncertainty regarding the economic outlook, citing risks of higher unemployment and inflation primarily due to trade policies and tariffs. Despite these concerns, the Fed noted that economic activity continues to expand at a solid pace.
Regarding the labor market, the Fed reported that unemployment has stabilized at a low level, with overall labor market conditions remaining strong. During the press conference, Chair Powell mentioned that inflation has remained stable, job creation is satisfactory, wages are healthy, and layoffs are not at high levels. However, he acknowledged a sharp decline in consumer and business sentiment. Powell also predicted that the first quarter GDP figure would be revised upward.
Addressing possible political pressure, Powell dismissed the notion that President Trump could influence the Fed’s decision to cut rates. He clarified that President Trump had never requested a meeting with him, nor would he seek such a meeting, as he has never requested a meeting with any president. Powell did not provide any timeline for when rate reductions might resume.
Productivity & Costs:The Bureau of Labor Statistics reported a 0.8% decrease in labor productivity for the non-farm business sector in the first quarter, following a revised 1.7% increase in the fourth quarter (up from 1.5%). During this period, output fell by 0.3% while hours worked rose by 0.6%. On an annual basis, labor productivity increased by 1.4% compared to the same quarter last year, which is slightly below the 1.5% annual average over the past 15 years and the long-term rate of 2.1% since the first quarter of 1947.
The strong productivity growth observed from the second quarter of 2022 to the fourth quarter of 2024 helped mitigate the inflationary effects of rising labor costs. However, the recent quarterly decline in productivity led to the highest increase in unit labor costs in a year, as businesses had to pay employees more to produce each unit of output. Unit labor costs surged by 5.7% in the first quarter, following a revised 2.0% increase in the fourth quarter (down from 2.2%). This rise was driven by a 4.8% increase in hourly compensation and a 0.8% decline in productivity. Over the past four quarters, unit labor costs have risen by 1.3%.
In the near term, labor productivity is expected to weaken further as businesses reassess their in-vestment plans amid uncertainty surrounding President Trump’s policies on tariffs, taxes, and de-regulation.
On a concluding note,, the U.S. stock markets experienced a slight dip this week but reduced volatility. The S&P 500 de-creased by 0.5%, increasing its year-to-date decline to 3.77%. Similarly, the Nasdaq declined by 0.27% this week, bringing its year-to-date decrease to 7.16%. The stock markets remained resilient and Treasury yields increased slightly this week, due mainly to the positive trade development with the U.K. and China. The two-year, five-year, and ten-year Treasury yields ended at 3.88%, 4.00%, and 4.37%, respectively, rising by 5, 8, and 4 basis points compared to their levels a week ago.
Regarding rate-cut expectations, the market now projects a 100% chance of two 0.25% cuts in 2025, totaling 0.5%, this week. This is a shift from last week’s projection of a 100% chance of three 0.25% cuts, totaling 0.75%. The market anticipates no rate cut in June and a 69% chance of one 0.25% rate cut in July. The first 100% chance of a 0.25% cut is expected at the September FOMC meeting, followed by an almost 100% chance of another 0.25% cut in October. Additionally, the market foresees a 0.25% cut with a 63% probability, which is considered a 50/50 chance.
Looking ahead,the Consumer Price Index (CPI) and Producer Price Index (PPI) reports for April are set to be re-leased on Tuesday and Thursday, respectively. The market anticipates a monthly headline CPI in-crease of 0.3% and an annual headline CPI of 2.4%. Additionally, April retail sales data will be announced on Thursday, with the market expecting no change (0.0%), down from the 1.5% increase recorded in March.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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