March retail sales beat expectations, consumer sentiment found a floor (even if the floor is a 75-year low) and pending home sales surprised to the upside. Read the fine print, though, and the picture is less encouraging. A blockbuster tax refund season carried the consumer through the first quarter, but that windfall has nearly run its course, and gasoline prices north of $4 a gallon are not going anywhere soon. 

Executive Summary 

• Retail sales rose 1.7% in March, beating consensus forecast, with control group sales up 0.7%. Income tax refunds surged 22.4% year-over-year in March, driving much of the upside. It is estimated that more than 80% of expected refunds have already been distributed. 
• The final April release from the University of Michigan revised the consumer sentiment index to 49.8 from the preliminary 47.6, still the lowest reading in the survey’s nearly 75-year history. Year-ahead inflation expectations settled at 4.7%, confirming the largest one-month jump since April 2025. 
• First quarter real consumer spending now tracks roughly 1% annualized, above the prior 0.7% baseline, but growth may fall in the second quarter as the refund tailwind fades. 
• Pending home sales surprised to the upside in March, rising 1.5%, but the increase does not likely signal the start of a trend. Business inventories broke a three-month stretch of no growth, rising 0.4% in February. 
• Initial jobless claims rose to 214,000; seasonal noise, not deterioration, drove the increase. 
• The Federal Reserve will almost certainly hold rates steady at next week’s Federal Open Market Committee (FOMC) meeting, which now looks likely to be Jerome Powell’s last as chair. Rate cuts will probably arrive later than previously assumed, as inflation is likely to stay elevated longer than anticipated, due largely to the artificial intelligence (AI) buildout. 
• AI-driven layoffs are accelerating in the technology sector, with an estimated 10,000 job cuts announced through mid-April, and the information sector layoff rate has diverged sharply from the overall private sector. 

The Consumer Spent the Windfall. Now What? 
The March retail sales report delivered a headline that looked better than it was. Sales rose 1.7%, beating the consensus forecast, but gas station receipts accounted for much of the jump as pump prices surged in the wake of the war. More telling was the 0.7% gain in control group sales, the subset that feeds directly into the broader Personal Consumption Expenditures (PCE) measure, which came in well above consensus.  

The strength owed much to a 22.4% year-over-year surge in income tax refunds issued during March, with middle- and upper-income households filing later and reaping the retroactive provisions of the One Big Beautiful Bill Act (OBBBA). That windfall is nearly spent. It is estimated that more than 80% of expected refunds have already been distributed, with only $40 to $45 billion more to flow by the end of May.  

First quarter real consumer spending now tracks roughly 1% annualized, an improvement from the prior 0.7% baseline, but growth might very well fall below 1% in the second quarter as the refund boost fades and the drag from high gasoline prices continues to build.  

• Key Takeaway: The consumer made it through Q1 on borrowed time and borrowed money. With the refund check cashed and gasoline still north of $4 a gallon, Q2 will test whether the labor market alone can keep spending afloat. 

Record-Low Sentiment, Record-High Expectations 
The ceasefire and the equity market rebound that it triggered managed to lift consumer sentiment from the abyss, but not by much. The final April release from the University of Michigan revised the consumer sentiment index to 49.8 from the preliminary 47.6, still the lowest in the survey’s nearly 75-year history.  

Gas prices stabilized in the second half of April and stocks rallied, easing some of the anxiety among low-income consumers who are most sensitive to pump prices. Year-ahead inflation expectations settled at 4.7%, confirming the largest single-month increase since April 2025, driven by average gas prices exceeding $4 per gallon throughout the month.  

Long-run inflation expectations rose to 3.5% from 3.2%, a move that bears watching given the Federal Reserve’s sensitivity to this anchor. The hit to real disposable income from higher gas prices is likely to slow consumption growth to around 2% this year, down from 2.6% in 2025, with low- and middle-income households absorbing the heaviest blow as a larger share of their spending goes toward gasoline. 

• Key Takeaway: A 2-point upward revision from the preliminary reading offers cold comfort when the revised number still sets a 75-year low. The gap between sentiment and spending has widened, but real income erosion from gasoline will eventually close it from the wrong direction. 

Housing and Inventories: Treading Water, Awaiting a Thaw 
Pending home sales surprised to the upside in March, rising 1.5% against flat forecasts, with gains in the Northeast and South offset by declines in the Midwest and West. The increase points to a modest improvement in existing home sales in April, but we do not view it as the beginning of an upward trend. With mortgage rates elevated and consumer confidence depressed, we expect sales to move sideways until later in the year, when declining oil prices should bring mortgage rates down with them.  

On the inventory side, business stockpiles broke a three-month stretch of no growth, rising 0.4% in February. Oxford Economics still estimates that stockbuilding dragged first quarter gross domestic product (GDP) by 0.4 percentage points, but expects inventory investment to swing into a positive contribution over the remainder of the year as restocking gains momentum. Inventories have become leaner in recent quarters, and business surveys corroborate the picture, with manufacturers increasingly reporting that customer inventories are too low. 

• Key Takeaway: Housing will remain frozen until mortgage rates thaw. The better news sits on the inventory side, where lean stockpiles and improving lending conditions set the stage for a restocking cycle that should support growth in the second half. 

The Fed at a Crossroads: Later Cuts, a New Chair and the AI Wildcard 
The Federal Reserve will almost certainly hold rates steady at this week’s FOMC meeting, and the focus will fall squarely on any signal about the future path of policy. It is likely that any rate cuts will arrive later than prior June and September assumptions. The shift reflects two developments: more stable conditions in the Middle East have slightly reduced the downside risks to the labor market, and inflation is likely to stay higher for longer, due largely to the AI buildout that continues to drive up prices for electronics, capital goods and related services.  

This week’s meeting now looks almost certain to be Powell’s last as Chair, after the Department of Justice announced it would drop its investigation. That should clear the way for Kevin Warsh’s confirmation. Warsh articulated familiar views at his Senate hearing: he believes AI-driven productivity gains will allow for more economic growth without stoking inflation, he favors slashing the Federal Reserve’s balance sheet and he prefers less public communication from the central bank. The bigger question for Federal Reserve independence is whether Powell will resign from the board entirely; his term as governor runs through January 2028, and he has indicated he will not leave until the investigation concludes with “transparency and finality.” 

• Key Takeaway: The Federal Reserve’s next move will be shaped less by oil prices and more by how persistent AI-driven inflation proves to be. If Warsh brings the conviction about AI productivity he expressed at his hearing, the central bank’s reaction function could shift in ways markets have not yet priced. 

The Labor Market: Still Standing, But AI Is Thinning the Ranks 
Initial claims for jobless benefits rose 6,000 to 214,000 in the week ended April 18, above the 210,000 consensus; however, seasonal adjustment noise rather than deterioration in labor market conditions drove the increase. On an unadjusted basis, claims continue to track below year-ago levels. Continued claims rose 12,000 to 1.821 million, though the pattern of downward revisions persists and the four-week moving average ticked up only slightly. The broader claims picture shows no evidence of war-related damage to the labor market, though it is likely the spillover from higher oil prices will arrive with a lag.  

One emerging fault line deserves attention: AI-driven layoffs in the technology sector. Tech firms announced an estimated 10,000 job cuts through mid-April, with several companies explicitly tying the reductions to investment in AI. The layoff rate in the information sector has risen sharply since late 2025, even as the overall private sector rate has held steady, making it one of the first tangible signs that AI adoption is reshaping the labor market from the inside out. 

• Key Takeaway: The labor market is stable in aggregate, but the AI layoff signal in the information sector is worth heeding. If technology is the leading edge of a broader reallocation, the transition will create pockets of pain even as the macro numbers hold. 

Final Thoughts 
This week brings the FOMC meeting, first quarter GDP, the PCE inflation report and quite possibly the final Powell press conference. It is a consequential stretch. GDP is likely to rebound above 2% annualized in the first quarter, driven by a sharp reversal of the government shutdown drag, with consumer spending moderate and business equipment investment strong on the back of the AI buildout.  

The consumer made it through Q1 on refund fumes and pre-war momentum, both of which are fading. The second quarter will be weaker, and the Federal Reserve seems to know it, which keeps rate cuts on the table this year even if they arrive later than previously expected. Markets have begun to price in a few more basis points of rate relief following the Warsh news, but they may very well be too conservative on the timing and magnitude of cuts. The Warsh confirmation adds a chairman who believes in AI-driven productivity and smaller balance sheets; the implications for monetary policy will unfold gradually rather than through any sudden pivot. The deeper question facing the economy is whether the AI buildout that is keeping inflation elevated is also generating enough productivity gains to support growth on the other side of the energy shock.  

The refund tailwind is spent. Gasoline prices remain high. And the labor market, while stable in aggregate, is beginning to sort winners from losers as AI adoption accelerates. The economy’s underlying growth potential remains north of 2%, driven by productivity. But the transition will be uneven, and the second quarter will test how much of Q1’s resilience was real and how much was borrowed. 

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