Weekly Update 5/29/2026: GDP Revised Lower as Incomes Moderate
- Dick's Sporting Goods reports solid earnings
- Boeing to increase production
- Initial jobless claims rise but remain low
Economic releases
The Commerce Department said yesterday that the U.S. economy grew at a 1.6% seasonally and inflation-adjusted annual rate during the first quarter. That was lower than the previous estimate of a 2.0% growth rate released earlier this year. Consumer spending, which comprises nearly two-thirds of GDP, rose at a lower 1.4% rate, compared to the previous estimate of 1.6%. The downgrade was also due to a lower estimate for inventory investment. This is a volatile category that is often subject to revisions as more data is collected. Profits after tax without inventory valuation and capital consumption adjustments, rose 3.3% from the prior quarter and was up 17% versus year ago. That was the largest year-over-year change in corporate profits since the final quarter of 2021 and is a prime reason why stocks have hit new records over the past few weeks.
According to the Commerce Department, U.S. consumer spending rose 0.1% in April while personal income was flat. Inflation-adjusted personal income fell 0.5%, marking the third consecutive monthly decline. The savings rate fell to 2.6%, the lowest since 2022. Inflation-adjusted spending on core goods, excluding food and energy categories, fell 0.2%. Inflation-adjusted services spending rose 0.2%, while an index that excludes energy and housing rose just 0.1%.
The closely watched personal consumption expenditure (PCE) index, which is a key input to the Fed’s monetary policy decisions, rose 3.8% on a yearly basis. That was in-line with the consensus figure in a survey of economists by Bloomberg. Excluding food and energy, that figure was up 3.3%, also in-line with expectations. Both figures were up from March’s levels and considerably higher than the 2.0% target sought by the Federal Reserve.
The main takeaways are that real spending has continued to moderate as higher prices weigh on consumers. It has not been severe enough, yet, to spark a widespread pullback, but real activity is certainly being affected. Sales of new U.S. homes fell in April according to data from Census Bureau, suggesting that this timely factor is depicting a market that is still struggling. Investors will also be focused on two factors that are likely affecting consumers but are totally out of their control: transfer payments and income from assets. The changes to the tax code have led to higher refund amounts than in previous years, but this is a short-term, non-repeatable event. By the end of the summer, this tailwind is likely to be exhausted. Additionally, the wealth effect is having a positive influence, especially upon middle- to higher-income households as stock markets hit new records. Will this continue each month for the rest of 2026? Nobody knows, but it is unlikely given current valuations and a higher bar for year-over-year earnings comparisons.
The next few months will be crucial for establishing a trend in the economy heading into the midterm elections. Even though aggregate personal income did not grow at all in April, consumers are dipping into savings and using the windfall from ballooning equity portfolios to continue spending. That is not sustainable and, as usual, it will come down to the health of the labor market because that is a source of sustainable household income. While initial jobless claims in the week ending May 23 continue to run at below year-ago levels, the latest 215,000 print was the highest since mid-April. Continuing claims, which measures the number of people receiving benefits, rose to 1.79 million, but still remains subdued historically speaking. Headlines include job cuts that mostly have affected white-collar positions in industries such as technology. Fears that artificial intelligence will disrupt the job market continue, but outside of certain sectors, deeper cuts have not been evident so far. Next week we will get two important data points: the Jobs Openings and Labor Turnover Survey and the monthly employment report from the Labor Department. These reports will cover April and May giving traders a fuller picture of how the labor market has been affected since the U.S. and Iran began military hostilities on February 28. Stay tuned next week for another insightful read!
Company Events
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