Economic Outlook - May 2026
- The Commerce Department reported that real gross domestic product (GDP) grew at an annualized rate of 2% in the first quarter of 2026. This initial reading was slightly below expectations but represents an acceleration from the 0.5% growth in the fourth quarter of 2025, which was impacted by the U.S. government shutdown. The main driver of the growth in the first quarter was business investment that surged to its fastest pace in nearly three years, fueled by spending on AI-related equipment and software. Consumer spending, which grew at a 1.6% pace in the quarter, was less than expected and a decline from last quarter’s 1.9% growth. Bad weather in January and February and the energy price surge in March likely curbed consumer outlays. We expect GDP growth to improve in the second quarter, and for the full year 2026, we anticipate real GDP growth in the range of 2% – 2.5%.
- The Institute for Supply Management (ISM) reported that the U.S. manufacturing sector and services sector both expanded in the month of April. The ISM Manufacturing Purchasing Managers’ Index (PMI) posted a reading of 52.7 in April. It is the fourth consecutive month of expansion following a ten-month period of contraction. The ISM Services PMI eased slightly in April to 53.6 from 54 in the previous month, but remained in expansion territory. The Employment Index rose to 48 from 45.2, indicating a modest improvement in labor market conditions in the services sector. Lastly and importantly, the Prices Paid Index, a crucial barometer of inflation, held steady at 70.7.
- The labor market remains resilient in the face of much uncertainty. The U.S. Bureau of Labor Statistics announced that nonfarm payrolls increased a seasonally adjusted 178,000 in March, exceeding the Dow Jones consensus estimate for 59,000 and a favorable reversal from a 133,000 decline in February. The health care sector added 76,000 jobs and was responsible for much of the growth. The unemployment rate edged slightly lower to 4.3% from February, and wage growth, as determined by average hourly earnings, was up 3.5% from a year ago, the lowest annual increase since May 2021. April nonfarm payrolls will be released on May 8, and consensus estimates forecast growth, though at a lower level than reported in March.
- The inflationary impact from the war with Iran is showing up in the latest economic data. The Bureau of Economic Analysis reported that the personal consumption expenditures, or PCE, index rose to 3.5% on an annual basis in March, its highest level since May 2023. The Federal Reserve’s preferred inflation measure, core PCE (which excludes volatile food and energy prices), was up 3.2% on an annual basis in March, an increase from the 3% level in February and its fastest pace since November 2023. The recent energy driven spike in inflation, while likely transitory if a deal with Iran can be completed, will challenge the Federal Reserve’s policy committee as they navigate a fine line between its dual mandates of maximum employment and stable prices.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, S&P Global, U.S. Bureau of Economic Analysis, Commerce Department, U.S. Federal Reserve, CNBC, Barron’s, Trading Economics, Institute for Supply Management, Wall Street Journal
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