For the first time in months, this week delivered something that has been in short supply: a reason for cautious optimism. Reports emerged that the United States and Iran may sign an agreement to reopen the Strait of Hormuz as early as the G7 summit next week. Gas prices have already fallen from $4.40 to $4.10 a gallon in June, consumer sentiment bounced off its record low and headline Consumer Price Index (CPI) inflation may have peaked. None of this means the headwinds have disappeared, but it could mean the fog is beginning to thin. The question now is whether the clearing lasts, or whether this is just a brief break in the clouds.
Executive Summary
Inflation: A Peak with a Long Tail
Headline CPI rose 0.5% in May, lifting the annual rate to 4.2%. Oxford Economics believes this likely marks the peak, as gasoline prices have already begun to fall in June. Core CPI came in at a relatively tame 0.2% on the month and 2.8% year-over-year, a shade below expectations. Shelter costs, the persistent thorn in the inflation story, rose just 0.3% in May after April’s 0.6% reading, which reflected a one-time adjustment the Bureau of Labor Statistics (BLS) had to make to correct for disruptions caused by last year’s government shutdown. Think of it this way: the fever may have broken, but the patient is not ready to leave the hospital.
The PPI told a less reassuring story. Headline producer prices jumped 1.1% in May, pushing the annual rate to 6.4%, its highest since November 2022. More concerning than the headline was the evidence that energy cost increases are broadening. Transportation and warehousing prices surged 2.6% on the month and 14.2% year-over-year, driven by elevated diesel fuel costs. Food prices rose 0.6%, up from a 0.2% gain in April, and the global fertilizer market has seen prices climb more than 28% year-over-year due to disruptions from the Middle East conflict. Fertilizer prices typically feed through to retail food prices with a six-to-twelve-month lag, which means grocery bills have not finished rising.
The artificial intelligence (AI) infrastructure boom is adding its own layer of price pressure. A shortage of DRAM memory chips, driven by surging AI demand, has pushed producer prices for computer storage devices up 2% in May and 19% year-over-year. The conflict in the Middle East has also damaged infrastructure critical to AI supply chains, including natural gas and helium plants. With both the May CPI and PPI data in hand, Oxford Economics’ PCE nowcast points to headline inflation reaching 4.1% year-over-year, the hottest reading since April 2023.
The Consumer: A Small Sip of Relief
After months of relentlessly unwelcome news, consumers caught a break. The University of
Michigan’s consumer sentiment index climbed to 48.9 in June from 44.8 in May, a decent bounce, though excluding last month’s reading, this would still be the lowest on record. The improvement tracked the decline in gasoline prices, which fell from $4.40 to $4.10 per gallon over the first two weeks of June. Gas prices still sit more than 30% above year-ago levels, but the direction of travel matters for psychology.
Inflation expectations edged lower as well. Year-ahead expectations ticked down to 4.6% from 4.8%, and long-run expectations dropped to 3.4% from 3.9%. That decline in long-run expectations is particularly welcome; stability on that front helps the Federal Reserve treat the oil price shock as a one-off rather than a permanent shift in the inflation regime. Low-income consumers, who spend a larger share of their budgets on gasoline, showed the biggest improvement in sentiment, a reminder that the direction of gas prices acts as an instant mood ring for the bottom half of the income distribution.
In the housing market, existing home sales rose 3.2% in May to a seasonally adjusted annualized rate (SAAR) of 4.17 million, above the consensus forecast. The supply of homes for sale ticked up only modestly for the spring selling season, the weakest May inventory build in years. The median price of an existing home climbed to $429,300, up 1.3% year-over-year. Given the 20-basis-point rise in mortgage rates over the course of May, the current pace is more likely a near-term ceiling rather than the start of an uptrend.
Overall, consumption growth remains on track for roughly 1.8% in 2026, down from 2.6% in 2025.
Small Business: Squeezed From Both Ends
If large corporations are the economy’s ocean liners, small businesses are the fishing boats, and the seas have been rough. The NFIB Small Business Optimism Index fell further below its long-run average in May, with the shock of higher energy prices pushing sales, hiring and capital spending intentions all lower. The uncertainty index jumped again and now sits well above historical norms. Inflation ranked as the single biggest challenge for 18% of firms, the highest share in nearly 18 months.
The labor market signals from the NFIB survey deserve attention. Hiring intentions fell sharply, and the share of firms reporting unfilled openings also declined, which implies that April’s jump in job openings, reported a few weeks ago in the JOLTS data, was more noise than signal. This caution also applies to the blockbuster May payroll report, which the NFIB data suggests may not reflect what smaller firms are actually experiencing on the ground.
The squeeze on small firms is coming from an unusual direction: both above and below. Larger businesses are adopting AI more rapidly, gaining productivity advantages that small firms cannot match. At the same time, AI tools are enabling a wave of new business formation, driven largely by solo operators without employees. Established small and medium-sized businesses find themselves caught between big companies moving faster and solo entrepreneurs moving cheaper. It is the economic equivalent of being a mid-sized sedan on a highway shared with both sports cars and motorcycles.
Trade and Fiscal: Oil Exports Up, Tax Revenue Down
The trade deficit narrowed to $55.9 billion in April from $56.6 billion, as a 2.6% rise in exports outpaced a 2.0% increase in imports. The story behind the numbers is almost entirely about oil. Petroleum product exports jumped $9.2 billion, a direct consequence of the US/Israel-Iran war rerouting global energy flows. On the import side, capital goods purchases continued to surge, up 39.3% year-over-year, driven by AI-related demand for computers, semiconductors and accessories. All other imports declined 4.3% over the same period. The reliance on foreign electronics equipment means that AI spending, for all its domestic fanfare, contributed next to nothing to first-quarter GDP growth on a net basis.
On the fiscal side, the fingerprints of the One Big Beautiful Bill Act (OBBBA) grew more visible. The Treasury reported a May budget deficit of $293 billion. For fiscal year 2026 to date, individual income taxes fell 4.1% and corporate taxes dropped 11.8%, clear evidence that the OBBBA’s tax cuts are beginning to weigh on receipts. Customs duties, once a bright spot, were effectively a net nothing in May as refunds of tariffs ruled unlawful by the Supreme Court fully offset incoming tariff revenue. Oxford Economics estimates roughly $23 billion of the anticipated $160 billion-plus in tariff refunds have gone out the door, with approximately $140 billion still in the pipeline. The full-year deficit forecast sits at $2.1 trillion, up from $1.91 trillion in fiscal year 2025.
The Fed and the War: Cautious Hope, Measured Response
The most consequential development this week may not have come from any economic release. Reports indicate that the United States and Iran may sign an agreement to reopen the Strait of Hormuz as early as next week at the G7 summit. An “agreement has never been closer,” according to sources. If a deal materializes, the macro implications are significant, though not immediate. Damaged or dormant production facilities will take time to restart, Iranian mines will need to be removed from the Strait and normal shipping traffic will not resume overnight.
Domestic oil producers, meanwhile, have been running down inventories rather than expanding production, with crude stocks down 10% since the war began and now sitting at their lowest level since 2022. Those inventories will need to be replenished, which means industrial production in mining should get a boost over the second half of the year even if production capacity does not markedly expand.
For the Federal Reserve, a potential end to the conflict supports the view that recent hawkish rhetoric is overdone. This would support a Federal Open Market Committee (FOMC) shift to a more neutral stance at the June 17 meeting, which new Chair Kevin Warsh will oversee for the first time. Nevertheless, Warsh’s appointment carries a dovish influence, and the door remains open to a cut by year-end.
Initial jobless claims rose 4,000 to 229,000 in the week ended June 6, a reading Oxford Economics attributes largely to seasonal noise around the end of the school year. Continued claims rose 24,000 to 1.795 million, though the prior week saw a 6,000 downward revision, continuing a pattern of persistent downward revisions. The claims data remain consistent with a stable-to-improving labor market, though claims have clearly bounced off their recent floor.
On the trade policy front, President Trump indicated this week that he would not reauthorize the United States-Mexico-Canada Agreement (USMCA), which would send the deal into rolling annual reviews rather than terminating it outright. Crucially, USMCA-compliant goods exemptions would remain intact, and existing tariffs on Canada and Mexico would stay in place indefinitely. The impact on the United States economy is modest given its diversified export base, but persistent uncertainty would remain a small drag on business investment.
Final Thoughts
This week felt different. Not dramatically, not conclusively, but materially. The possibility that the Strait of Hormuz reopens within weeks, combined with a CPI that appears to have peaked and gas prices already declining, gives the 2026 macro story its first positive plot twist. The PPI at 6.4% and small business data that signal genuine distress are reminders that the damage from three months of war does not reverse quickly. But the direction matters, and for the first time since March, the direction is pointing toward improvement rather than further deterioration.
The consumer remains the economy’s bellwether. Sentiment bounced in June, but it bounced from the lowest point in the survey’s history, and the K-shaped divide between upper-income resilience and lower-income stress has not closed. Small businesses are paring back hiring and investment, which the headline labor data does not fully reflect. The fiscal outlook is deteriorating as the OBBBA’s tax cuts and tariff refunds reduce government revenue.
What makes this week’s data constructive is not that the problems have gone away, but that the ceiling on those problems may be forming. If the peace talks produce a deal, the energy shock that has driven much of this year’s economic pain begins to unwind, slowly and unevenly, but in a direction that helps. The Fed meets next week under new leadership, with an inflation picture that, while still uncomfortable, is no longer worsening. For the first time in months, the light at the end of the pipeline may actually be daylight.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2606-20
The May employment report landed like a firework at the end of a week that already had plenty of sparks. Payrolls exceeded expectations, manufacturing hit a four-year high and the services sector continued to expand. But before anyone uncorks the champagne, consider that job openings surged on the strength of a single industry, credit card delinquencies climbed to levels not seen since 2011, and the Federal Reserve’s newest members spent the week reminding everyone that inflation is still the main event. This is an economy with a strong pulse and a rising temperature, and that combination creates a very specific set of challenges.
Executive Summary
The Labor Market: A Blockbuster with Fine Print
May’s payroll report read like a summer action movie: big numbers, plenty of explosions and a plot that falls apart a little if you think too hard. Nonfarm payrolls jumped 172,000, and the Bureau of Labor Statistics (BLS) revised April up by 64,000 and March up by 29,000. Private-sector payrolls added 120,000. The gains came from familiar corners: healthcare posted a solid increase, construction surprised to the upside, and leisure and hospitality delivered strong numbers, likely with an assist from early World Cup hiring. State and local government employment, however, jumped by roughly 50,000, a figure Oxford Economics views as a one-off rather than the start of a new trend.
The Automatic Data Processing (ADP) national employment report added 122,000 private jobs in May, pushing its three-month moving average to 96,000. That number sits comfortably above the break-even rate of job creation, which Oxford Economics estimates at approximately zero given the collapse in net immigration and an aging population.
Now for the fine print. The JOLTS report showed job openings jumping 731,000 to 7.618 million, the highest since May 2024. Impressive, until you notice that 668,000 of the increase came from a single sector, professional and business services, and the overall hire rate actually fell 0.3 points to 3.2%. Both the quits rate and the layoff rate ticked lower, painting a picture of a labor market in a holding pattern: employers are posting openings like stores hanging “help wanted” signs but not necessarily rushing to fill them.
The unemployment rate held steady at 4.3%, as labor force growth remained sluggish at just 83,000. Average hourly earnings rose 0.3% month-over-month and 3.5% year-over-year, a pace consistent with the Fed’s 2% inflation target, which means the labor market is not generating inflationary wage pressure on its own.
Manufacturing and Services: Growing but Paying Through the Nose
The factory floor had a good month. The ISM manufacturing index climbed 1.3 points to 54.0, its fastest pace of expansion since May 2022. New orders rose 2.7 points to 56.8 and 14 of 18 industries expanded new orders and production in May, a sign that the upturn has real breadth. Customer inventories remained in “too low” territory, which suggests the demand pipeline has room to run.
The catch is the price tag. The ISM prices index hovered near its highest level since the pandemic, driven by the Strait of Hormuz closure pushing up oil, fuel and raw materials costs. Producers also face shortages in memory, semiconductors and electronic components, a reminder that the artificial intelligence (AI) infrastructure boom is competing for the same inputs that manufacturers need. Think of it as two dinner guests reaching for the last bread roll at the same time.
On the services side, the ISM nonmanufacturing index rose 0.9 points to 54.5, with business activity and new orders both posting solid increases. But here, too, prices are the story: the services price index climbed to its highest reading since August 2022, with energy costs the most commonly cited culprit. The report is consistent with GDP growth running at roughly a 2% annualized pace this year, a decent clip given the headwinds, but the employment index remained in contraction territory, reflecting firms that are reluctant to add headcount even as business activity improves.
The Consumer: Spending Now, Worrying Later
Vehicle sales offered a snapshot of the consumer’s current mood: optimistic enough to buy a car but glancing nervously at the gas gauge. Light vehicle sales rose to 16.1 million annualized in May from 15.9 million in April, with Q2 sales tracking 3.7% above Q1 levels. A strong tax refund season and rising equity markets have kept consumers shopping, at least for now. But there are headwinds gathering. The $7,500 electric vehicle (EV) tax credit expired last fall, and the share of full-electric and plug-in hybrid vehicles in total sales dropped to just 6% in April from an average above 9% in 2025. Oxford Economics’ baseline calls for light vehicle sales to total 15.7 million in 2026, softer than the 16.2 million recorded in 2025.
Consumer credit painted a more complex picture. Total consumer credit rose $20.7 billion in April, with revolving credit up $11.6 billion and nonrevolving credit ahead by $9.1 billion. Revolving credit growth hit 3.8% year-over-year, its fastest pace since October 2024. Some of that reflects gasoline spending flowing onto credit cards. The less cheerful detail: the share of credit card balances more than 90 days delinquent has risen to its highest level since 2011, evidence that the consumers who are struggling are falling further behind, even as the top of the income distribution keeps spending.
The Federal Reserve’s Beige Book captured this divide in plain English, noting that higher-income households continue to spend freely while both middle- and lower-income households are pulling back on discretionary items. The top 20% of income earners account for more than half of new vehicle sales, which helps explain how the headline spending numbers remain positive even as the bottom half of the income ladder feels increasingly squeezed. Think of a boat where the passengers in first class are ordering drinks while the folks in economy are bailing water.
Housing and Construction: A Temporary Bump in the Road
April construction spending rose 0.4%, well above the consensus forecast for a decline of 0.1%. Before celebrating, take a look at what happened to the prior months: March’s gain shrank from 0.6% to 0.2% on revision, and February’s small decline deepened to a 0.8% drop. Construction data are a bit like a student’s test scores that look great until you realize the grading curve changed. The underlying trend is less impressive than the latest month suggests.
Residential spending provided a genuine bright spot, lending some upside risk to the Q2 residential investment forecast. Private nonresidential spending, however, slipped 0.2%. Within that category, spending on data centers continues to outpace everything else, but even data center spending is losing momentum. Manufacturing structures remain weak as the capital spending impulse from the CHIPS and Science Act and the Inflation Reduction Act (IRA) has largely played through. Apart from the AI-driven data center buildout, nonresidential spending faces a sluggish few quarters as uncertainty from the Iran conflict and rising input costs keep decision-makers cautious.
The Fed: New Chair, Same Dilemma
If there is one piece of good news for the Federal Reserve in this week’s data, it is that the labor market is not generating inflationary pressure. Annual productivity growth sits at 2.8%, well above prior-cycle averages, and annual unit labor cost growth slipped to 0.5%, the slowest pace since 2021. In plain terms, companies are getting more output per worker and paying less per unit of that output. That combination means the Fed does not need to worry about a wage-price spiral, even as hiring picks up.
Where the Fed does need to worry is on the price side. The Beige Book reported that profit margins are being compressed as input costs, led by energy, climb faster than firms can raise selling prices. That sounds like a problem for companies, but it also means that when firms eventually do pass through those costs, the consumer will feel it. Public remarks from Federal Open Market Committee (FOMC) members grew more hawkish through the week, with Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack both raising the possibility that the committee may need to address inflation that extends beyond energy. The June 17 meeting, which new Fed Chair Kevin Warsh will oversee for the first time, could produce a statement that removes language indicating a bias toward easing, a shift that would be notable even if rates themselves stay unchanged.
Initial jobless claims rose 13,000 to 225,000 in the week ended May 30, likely reflecting seasonal noise around the Memorial Day holiday rather than a genuine uptick. Continued claims fell 8,000 to 1.777 million, keeping the broader trend intact. The claims data give the Fed enough comfort to hold rates steady for as long as it needs. On the tariff front, Oxford Economics estimates the effective tariff rate nudged up to 9.7% from 9.3% following new announcements aimed at countries that do not restrict imports from forced-labor suppliers, a modest addition that does not change the tariff picture materially.
Final Thoughts
This was the week the economy flexed its muscles and reminded everyone that it is still capable of producing strong numbers. Payrolls at 172,000, manufacturing at a four-year high, and services firmly in expansion: these are not the data points of an economy in distress. They are the data points of an economy that keeps finding a way to grow even as the Iran conflict, elevated energy costs and tighter immigration policy stack up headwinds.
But a strong economy running hot creates its own set of problems. The ISM price indices sitting near pandemic-era levels, credit card delinquencies at a 14-year high and FOMC members publicly floating the idea of further tightening all suggest that the bill for this growth is arriving. The consumer is funding spending through shrinking savings and expanding credit, not rising real incomes. That works for a while, but it is not a recipe for sustainability.
The two-speed dynamic persists: businesses investing aggressively (in narrow areas), upper-income households spending confidently and the bottom half of the income distribution absorbing the brunt of higher prices. The labor market gives the Fed cover to hold steady, but price pressures give it no room to ease. For now, the strong pulse and the rising temperature coexist, and the question for every investor, policymaker and household is how long that balance holds.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers.OFG-2606-7
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Oxford Financial Group, Ltd. (“Oxford”) is a Registered Investment Advisor (“RIA”) with the U.S. Securities and Exchange Commission (“SEC”) and is headquartered in Carmel, Indiana. Registration with the SEC does not imply a certain level of skill or training. Additional information about Oxford, including our Form ADV and Privacy Policy, is available upon request by calling 800.722.2289 or emailing info@ofgltd.com. The content of this presentation is intended for educational and illustrative purposes only. It should not be construed as investment, tax, or legal advice, nor as a recommendation or offer to buy or sell any security or investment product. Tax and legal counsel should be engaged before taking any action. This material has been prepared using original sources believed to be reliable, but no representation is made as to its accuracy or completeness. The views expressed are those of Oxford as of the date of the presentation and are subject to change based on market, regulatory or economic conditions, which may not occur as anticipated. For full disclosures and disclaimers, please visit https://ofgltd.com/home/disclaimers. OFG-2605-47
Tax season gave American consumers one last gift, and now the credit card statement has arrived in the form of gasoline averaging $4.25 a gallon nationwide. This week’s data told the story of an economy with a split personality: business investment humming along like a well-tuned engine, while the consumer starts to sputter. The Conference Board’s confidence measure fell for the first time since the onset of the US/Israel-Iran war and savings rates sank to levels not seen since 2022, yet the labor market continues to hold firm. Understanding which of these signals matters most is the challenge of the moment.
Executive Summary
The Consumer: When the Sugar High Fades
For the past few months, a historically generous tax refund season acted as a kind of financial aspirin, masking the headache of higher energy costs. That aspirin has worn off. The Conference Board’s consumer confidence index slipped to 93.1 in May from an upwardly revised 93.8 in April, the first outright decline since the US/Israel-Iran war began. Year-ahead inflation expectations held at 6.2% for a third consecutive month, up from 5.5% in February, and the gap between consumers calling jobs plentiful versus hard to get narrowed to 6.9 points from 7.5 in April.
The April spending data filled in the picture. Nominal consumer spending rose 0.5%, but gasoline accounted for roughly a quarter of that increase, which is a bit like celebrating a raise that goes entirely to your landlord. In real terms, spending edged up just 0.1%. The personal savings rate fell to its lowest level since 2022, a sign that some households are dipping into savings to keep up with the cost of filling the tank and buying groceries.
Through the end of May, individual income tax refunds ran $51 billion, or 18%, above last year, reflecting the boost from the One Big Beautiful Budget Act (OBBBA). That tailwind is now behind us. Oxford Economics pegs consumption growth at 1.9% for 2026, down from 2.6% in 2025, though a sharp rebound in equity markets over recent months cushions the blow for higher-income households. The K-shaped split that has defined this cycle is deepening, with upper-income consumers propped up by portfolio gains while lower-income households absorb the gasoline tax that nobody voted for.
Business Investment: The Economy’s Bright Spot
If the consumer is the economy’s worried passenger, business investment is the driver with both hands on the wheel. Headline durable goods orders surged 7.9% in April, with a strong month of Boeing net new orders pushing transportation and the headline measures higher. The more meaningful signal came from non-defense capital goods orders excluding aircraft, which dipped 1.1% after two consecutive months of solid gains, while shipments in the same category, which feed directly into GDP, rose 0.4%.
Oxford Economics’ tracker points to business equipment investment rising close to 7% annualized in Q2, a step down from the blistering 17% gain in Q1 but still a pace that most economies would envy on their best day. Think of it as downshifting from fifth gear to fourth; the car is still moving fast.
Two forces are doing the heavy lifting. The continued rapid buildout of artificial intelligence (AI) infrastructure, along with associated data center and power-grid spending, keeps order books full. The OBBB provisions for full upfront expensing of equipment investment give firms a strong incentive to pull capital expenditures forward. The energy shock and Iran war uncertainty have trimmed some froth from the edges of capital goods orders, but neither has dented the fundamental appetite for investment spending. That said, if the conflict drags on and energy costs remain elevated, even the most eager capital spenders may start to reassess their timelines.
The Labor Market: Steady Hands on a Shaky Table
Initial jobless claims rose 5,000 to 215,000 in the week ended May 23, a shade above the consensus estimate of 213,000 but hardly cause for alarm. On an unadjusted basis, claims tracked 9.1% below year-ago levels, a gap that suggests employers are still reluctant to hand out pink slips despite three months of war, elevated inflation and lingering tariff uncertainty.
Continued claims rose 15,000 to 1.786 million in the week ended May 16, though the prior week saw an 11,000 downward revision. After trending lower for several months, both initial and continued claims appear to have found a floor and may move sideways from here. That is not a sign of deterioration; it is more like a car that has coasted downhill and reached flat ground. The labor market is no longer improving at the margins, but it is not rolling backward either.
Looking ahead to next week’s May employment report, Oxford Economics looks for a gain of 80,000 in nonfarm payrolls, a slowdown from April but still a healthy number. One wrinkle worth watching: household employment, which captures self-employment and agricultural jobs, has declined by an average of 158,000 per month over the last three months. That divergence between the payroll and household surveys bears monitoring. Oxford Economics sees the unemployment rate hovering in the 4.3% to 4.4% range through year-end, held in check by slower labor-force growth from reduced immigration and an aging population.
Housing: A Tale of Two Zip Codes
National home price data for March told a story of stabilization with an asterisk. The S&P CoreLogic Case-Shiller national index slipped 0.2% month-over-month, while year-over-year growth held at 0.7%, unchanged from February. Among the 20 metros tracked by the 20-city index, annual price changes ranged from a decline of 2.5% in Seattle to a gain of 6.1% in Chicago, a spread wide enough to make the national average almost meaningless. The FHFA house price index edged up 0.1% month-over-month and 1.7% year-over-year.
Looking ahead, base effects that dragged on annual price growth over recent months have shifted and should support modestly stronger year-over-year figures through early summer. The more interesting development is happening at the regional level. Markets in the South and West that saw the biggest inventory buildups are now correcting. Florida’s housing supply fell 12% year-over-year in April, a dramatic reversal from the 35% increase recorded a year earlier. That kind of swing suggests the worst of the oversupply pressure in those markets may be passing.
New-home sales, meanwhile, came in on the soft side, and the near-term outlook remains constrained by elevated mortgage rates and builders’ gradual pullback from price concessions. The housing market resembles a bathtub with the faucet barely running and the drain partly open: not emptying, not filling, just sitting at a tepid level that satisfies nobody.
Inflation and the Fed: Still Sitting in the Waiting Room
The headline Personal Consumption Expenditures Price Index (PCE) deflator crept up to 3.8% in April, while core PCE continues to track close to 3%. Neither number gives the Federal Reserve much to celebrate. First-quarter GDP growth took a revision down to 1.6% from the initial estimate of 2.0%, reflecting weaker consumer services and business software spending than the advance release had assumed. The economy is growing, but at a pace that feels like walking uphill in sand.
On the energy front, oil prices have fallen more than 20% from their recent peak, but it looks like it could take through the end of the year for traffic through the Strait of Hormuz to return to pre-war levels. That means households should brace for elevated gasoline prices through the summer driving season and into the fall, a longer stretch of pain than earlier estimates suggested.
The Fed, for its part, appears content to sit and wait. The claims data and broader labor indicators give the committee enough comfort to hold policy steady while it focuses on the inflation side of its dual mandate. Financial markets continue to price in a rate hike, but that seems unlikely as the Fed would need to see a meaningful acceleration in services inflation to justify tightening. In other words, the Fed is still sitting in the waiting room, but the magazine selection just got a little better.
Final Thoughts
This week’s data drew a clear line between two very different stories playing out in the same economy. On one side, businesses continue to invest aggressively, drawn by AI demand and generous tax provisions. On the other, the American consumer is starting to feel the pinch as the tax refund cushion evaporates and gasoline costs remain stubbornly high. The savings rate falling to its lowest level since 2022 is not a statistic to dismiss lightly; it signals that households are stretching to maintain their standard of living.
The labor market, once again, sits at the center of the story. Claims data suggest a floor has formed rather than a springboard for further improvement, and the divergence between payroll and household employment measures adds a layer of ambiguity to what otherwise looks like a healthy picture. The Conference Board confidence decline, modest as it was, reminds us that consumer perception can shift quickly once the real-world effects of higher prices start to bite.
Recession odds have eased and the corporate investment cycle has legs, but the consumer is the swing factor. If spending slows more than the current trajectory suggests, the feedback loop into hiring and confidence could tighten faster than the aggregate data implies. The two-speed economy has room to run, but how long the weaker engine can keep up with the stronger one is the question that matters most heading into the summer months.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers.OFG-2606-1
The Federal Reserve finds itself in a monetary policy escape room where every door leads to a different problem. Inflation will not cooperate, consumer confidence just cratered to another record low and the labor market stubbornly refuses to crack. This week’s data reinforces a picture we have been watching for months: an economy that is too warm for rate cuts and too fragile for rate hikes, leaving policymakers pinned in place with nothing to do but talk tough.
Executive Summary
The Fed’s Escape Room Has No Exit
Think of the Federal Reserve as a chess player who has run out of good moves. The April FOMC minutes laid out a laundry list of preconditions before the committee will consider easing policy. Most participants noted that tightening could be appropriate if inflation remains above 2%, while several indicated cuts could be warranted only if the conflict in the Middle East resolved quickly and the effects of higher tariffs and energy prices dissipated. That is a long wish list, and it amounts to a conditional ceasefire on rate cuts.
Financial markets have taken the message to heart, now pricing in rate hikes over the next 12 months. The bar for actually raising rates seems to remain high. The claims data and the broader labor market picture suggest the Fed would rather rely on hawkish rhetoric to do some of the heavy lifting, a kind of verbal tightening that costs nothing but credibility if it fails. The April minutes also pushed odds higher that the Fed stays on hold into next year.
Oxford Economics’ baseline remains a single 25-basis-point cut in December, bringing the federal funds rate to 3.375% by year-end. But if inflation prints continue to surprise to the upside, that December move starts looking more like a wish than a forecast. The Fed, for now, is doing its best impression of a parent counting to three: everyone knows the number keeps resetting.
Inflation: The Houseguest Who Will Not Leave
Inflation has become that dinner guest who keeps finding one more reason to stay. Oxford Economics’ supply-chain stress tracker climbed to a three-year high, driven by a jump in air freight rates, though it remains well short of the 2022 peak. Supplier delivery times and order backlogs are rising, and the longer the Strait of Hormuz closure persists, the more likely these frictions will feed through into broader goods and services prices.
The combination of the energy price shock and strong demand from the artificial intelligence (AI) infrastructure buildout will keep core inflation sticky. Oxford Economics forecasts core PCE inflation to average 3.0% for 2026, with supply-chain stress adding upside risk. That number alone should give the Fed pause before reaching for the rate-cut lever.
Consumer inflation expectations tell a similar story. Year-ahead expectations jumped to 4.8% and long-run expectations rose to 3.9%, both the highest readings of 2026, though still below the peaks that followed the Liberation Day tariff announcements. A sustained drift higher in long-run expectations would limit the Fed’s ability to treat the oil price shock as a one-off event, effectively locking the committee into a more hawkish posture. If inflation expectations become unanchored, the Fed moves from being boxed in to being walled off.
The Consumer: A Tale of Two Tax Brackets
The University of Michigan revised its May consumer sentiment reading sharply lower, to 44.8 from 48.2 in the preliminary release, marking another record low for the survey. Gas prices continued to rise despite the ceasefire, and that pain lands disproportionately on lower-income households. Equity markets, by contrast, have shrugged off the conflict, and sentiment among higher-income consumers dipped only marginally. The top 20% of households by income account for 40% of all consumer spending, so the economy keeps moving forward even as its lower gears grind.
Oxford Economics expects consumption growth to decelerate to 1.9% this year, down from 2.6% in 2025. The tax refund season provided a temporary sugar high earlier in the spring, but that cushion is now spent, and we are heading into peak driving season with gasoline prices acting like a slow leak in household budgets. Lower- and middle-income families will bear the brunt of this squeeze, widening the K-shaped divide that already defines this cycle.
Meanwhile, roughly $160 billion in IEEPA tariff refunds are flowing back to importers, with about $20 billion already out the door and another $80 billion expected in May and June. Before anyone celebrates, these refunds will flow almost entirely to corporate profits, with firms unlikely to alter hiring, spending or pricing decisions. Think of it as a check written to the building owner, not the tenants. The consumer will not feel it.
Housing: Treading Water in a Rising Tide of Rates
The NAHB housing market index rose three points to 37 in May, beating expectations of an unchanged 34 reading, but that improvement is relative. A score of 37 still signals poor conditions, like a student celebrating a D-plus after a string of Fs. Builders cited higher mortgage rates, rising gas prices and uncertainty around the Iran conflict as ongoing headwinds.
April housing starts fell 2.8% to a SAAR of 1.465 million, which actually landed well above the below-consensus forecast of 1.355 million. The upside surprise came entirely from multifamily, where starts jumped 10.3%; single-family starts fell 9%. Single-family permits slipped to their lowest level since August 2025, reinforcing the view that the bigger driver of residential Gross Domestic Product (GDP) continues to soften while the smaller multifamily sector carries the headline.
Pending home sales posted a 1.4% gain in April, led by the Northeast and Midwest, but there is little momentum behind the move. Interest rates have risen nearly 25 basis points since the end of April, and that fresh headwind should keep a lid on sales in the months ahead. Builders continue to offer incentives; in May, 32% offered price cuts, down from 36% in April, as they balance the need to clear inventory against the desire to protect margins. The supply of unsold completed homes remains near levels not seen since mid-2009.
The Labor Market: Boring in the Best Possible Way
In a week of record-low sentiment and hawkish Fed minutes, the labor market delivered something almost refreshing: nothing dramatic. Initial jobless claims fell 3,000 to 209,000 in the week ended May 16, and the four-week moving average dipped 1,500 to 202,500. On an unadjusted basis, claims tracked 6.4% below year-ago levels. Claims have remained in a narrow band between 200,000 and 215,000 since mid-February, a stretch of stability that reads like a flat heart monitor in the best possible way.
Continued claims rose 6,000 to 1.782 million in the week ended May 9, but the modest increase kept the downward trend in the four-week moving average intact. Florida’s claims remain elevated following the Spirit Airlines closure, which affected roughly 17,000 workers, but the broader picture remains one of few layoffs. Employers are holding on to their workers the way a hiker holds on to a water bottle in the desert; even if they are not drinking much, they know letting go would be a mistake.
Oxford Economics’ latest immigration tracker reinforces its forecast for net immigration of roughly 160,000 per year for the foreseeable future, well below historical norms, pointing to near-zero labor force growth over the next two years. The combination of cautious hiring and limited labor supply growth creates a floor under wages but also limits the economy’s potential growth rate. The labor market, in short, is giving the Fed just enough comfort to sit still.
Final Thoughts
This was the week the Fed’s dilemma came into sharpest focus. The April FOMC minutes drew a line in the sand on rate cuts, consumer sentiment cratered to a level not seen in the survey’s history, and yet employers kept writing paychecks as though nothing had changed. The economy is sending mixed signals the way a car might flash its check-engine light while still accelerating; something is off under the hood, but the wheels have not come off yet.
The core tension remains the same one that has defined 2026: inflation fueled by energy disruption and AI-driven demand will not cool fast enough to give the Fed permission to ease, while the real economy has not weakened enough to force the committee’s hand. Supply-chain stress at a three-year high, core PCE tracking 3% and long-run inflation expectations drifting toward 4% all argue for patience. On the other side of the ledger, record-low sentiment, a K-shaped consumer split and a housing market stuck in neutral all argue that patience has a cost.
It seems possible that we could still get one rate cut in December, but the margin for error on that call narrows with every hawkish data point. The labor market’s remarkable stability is the fulcrum on which everything balances. If claims stay in their current band and payrolls hold, the Fed can afford to wait. If either crack, the calculus changes quickly. For now, the economy bends but does not break, and the Fed counts to three without ever reaching it.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2604-23
Tax and Planning Considerations for Private Placement Insurance
We’re proud to share that Oxford’s Chief Wealth Planning Officer, Russell DeLibero, PhD, CFP®, ChFC®, CLU®, AEP®, has been published in the National Association of Estate Planners & Councils’ Journal of Estate & Tax Planning.
Private Placement Insurance is a topic that has received growing attention in the wealth planning community, and for good reason. For qualified purchasers and accredited investors, these structures can offer meaningful tax advantages, access to institutional investment options and planning flexibility not available through retail insurance products. At the same time, they carry important considerations around structure, fees, ownership and regulatory compliance that require careful evaluation.
In his feature, Russ examines the full landscape of Private Placement Insurance, including both Private Placement Life Insurance and Private Placement Variable Annuities. He covers the key structural and tax distinctions between the two, investment allocation options including insurance dedicated funds and separately managed accounts, ownership considerations and their transfer tax implications, fee structures and how to evaluate them and the regulatory scrutiny the space has attracted in recent years.
For families and advisors navigating complex wealth planning, understanding the nuances of these instruments, and where they fit within a broader estate and tax strategy, is increasingly relevant.
Russ is a national speaker and author whose work has been presented at leading institutions including Heckerling, NAEPC, USC and Emory. This publication is a reflection of his continued commitment to advancing the conversation around sophisticated wealth planning strategies.
Producer prices hit 6%. Consumer prices hit 3.8%. And the economy, like a marathon runner who has not yet noticed the blister forming at mile 18, kept right on going. This week’s data painted a picture of an inflation pipeline running at full pressure and an economy too resilient for its own good, at least from the Federal Reserve’s perspective.
Executive Summary
The Inflation Pipeline: Full, and Getting Fuller
Headline CPI inflation climbed to 3.8% year-over-year in April, a multiyear high, while core CPI edged up to 2.8%. The April core reading carried more noise than signal: a statistical quirk from last fall’s government shutdown artificially boosted the shelter component (a one-time correction with no bearing on the trajectory of housing inflation), and used vehicle prices flattened after months of declines partly because outsized tax refunds from the One Big Beautiful Bill Act (OBBBA) generated a temporary burst of demand for used cars. Like a sugar high, that boost will not last. Apparel prices kept climbing on tariff passthrough, while airlines passed along higher jet fuel costs through rising airfares (think of it as an oil surcharge that is slowly spreading from the pump to the boarding gate, to the grocery aisle).
Further up the supply chain, the picture looks worse. The PPI surged 1.4% month-over-month to 6.0% year-over-year, its highest since December 2022, with core producer prices jumping 1.0% as diesel costs (up 60% since the war began) drove transportation and warehousing services up 5% in a single month. The AI buildout continues to turbocharge electronics inflation; producer prices for electronic components rose 27% year-over-year on a global shortage of Dynamic Random-Access Memory (DRAM) semiconductor chips that shows no sign of abating. Import prices added to the chorus, rising 1.9% month-over-month to 4.2% year-over-year, the strongest since October 2022.
Taking all the incoming price data together, Oxford Economics’ PCE nowcast points to headline inflation of 3.8% year-over-year and core of 3.3%, the hottest since May 2023.
The Consumer Refuses to Buckle
Retail sales rose 0.5% in April, matching expectations, with Oxford Economics’ nowcast showing consumer prices rising by a similar amount, which means volumes held roughly flat after March’s solid gain. Beneath the headlines, online sales and spending at bars and restaurants continued to post healthy gains, while furniture remained the conspicuous laggard, weighed down by a housing market that refuses to thaw.
The consumer’s staying power through this oil shock has a specific explanation: income tax refunds from the OBBBA offset the gasoline burden by a ratio of approximately two to one through March and April. That ratio is about to flip. With refund season in the rearview mirror and gas prices still creeping higher, it is likely that spending on other goods and services will slow in the months ahead. For now, the numbers remain encouraging. Upward revisions to earlier months lifted first quarter consumer spending to a 1.8% annualized pace, and the second quarter nowcast tracks close to 2%, above a baseline forecast of 1.6%.
Factories, Firms and the AI Freight Train
Industrial production surged past expectations in April, with manufacturing driving the rebound and the prior month’s decline revised to be shallower than initially reported. Motor vehicles and parts posted a substantial gain, lifted by a stock market rally that has boosted consumer wealth and appetite for big-ticket purchases, while computers and electronics production continue in the fast lane as the AI buildout pulls defense, space and electrical equipment output along for the ride.
Not everything looked rosy: chemicals, plastics and rubber output weakened, an early signal that petroleum-based manufacturing is beginning to feel the war’s gravitational pull. Small businesses echoed the improving tone, with the NFIB optimism index rising marginally in April, hiring intentions inching higher, and unfilled positions reaching their highest level since May 2025. Planned price increases ticked moderately upward, though businesses are still absorbing much of the energy cost increase rather than passing it along to customers already exhausted by years of inflation. Business inventories jumped in March, reinforcing the positive contribution of stock building to first quarter GDP, and with inventory-to-sales ratios declining and manufacturers reporting that customer stockpiles are too low, restocking could become a meaningful tailwind for the remainder of the year.
Housing: Down, but No Longer the Business Cycle
Existing home sales edged up just 0.2% in April to a seasonally adjusted annual rate (SAAR) of 4.02 million, below some estimates. Sales are likely to hover near the 4 million mark until late this year if the Federal Reserve holds off rates cuts until December. The supply of homes for sale rose 5.8% to 1.47 million, but for April, when the spring selling season normally kicks into high gear, that increase fell well short of the 10-year average of 9%; higher mortgage rates and war-related uncertainty continue to keep both buyers and sellers on the sidelines. Median prices rose 0.9% year-over-year, with the familiar regional pattern intact: the Northeast and Midwest posting gains while the South held flat and the West remained slightly negative.
The more important observation, however, is that housing no longer plays the role in the business cycle that it once did. Equities now account for a larger share of household wealth than real estate, and the wealth effects from financial assets are also larger in magnitude, which means AI-driven stock market gains matter more for consumer spending than a frozen housing market. With the homeowner vacancy rate near historic lows, structural undersupply places a floor under prices even as mortgage rates discourage activity.
The New Fed, the Old Problem
Kevin Warsh took the reins at the Federal Reserve this week, confirmed by the Senate with two self-imposed mandates: lower interest rates and shrink the central bank’s balance sheet. Inflation running well above the 2% target and labor market conditions that are stabilizing, if not improving, leave little support for rate cuts in the near term. Shrinking the balance sheet will prove equally stubborn, as further runoff risks pushing up Treasury and mortgage rates, straining repo markets and increasing funding volatility; assuming Warsh can build consensus among Federal Open Market Committee (FOMC) members, the process would likely take years.
On the trade front, President Trump’s summit with President Xi steadied bilateral relations and reduced the tail risk of further tariff escalation, with Boeing orders, agricultural purchase commitments and NVIDIA chip clearances among the announced deals, though Phase One-style pledges from China have a checkered track record.
The federal budget posted a surplus of $215 billion in April, smaller than the $258 billion a year earlier as OBBBA tax cuts reduced individual income tax receipts by 4.1% and corporate receipts by 11.8%. Oxford Economics estimates the fiscal year 2026 deficit will total $2.085 trillion, or 6.5% of GDP, with risks tilted toward a larger shortfall as war costs mount and tariff refunds accelerate.
CIO View
If the economy were a patient, the diagnosis this week would read: vital signs strong, temperature elevated, prognosis favorable but requiring monitoring. Producer prices at 6%, consumer prices at 3.8%, and a labor market that is quietly tightening do not describe an economy in need of emergency intervention. They describe one that can afford to let inflation burn off naturally as the energy shock fades, even if the process is slower than anyone would like. It is more likely now that we will get a rate cut in December, later than consensus but more dovish than market pricing. The May baseline confirms GDP growth of 2.2% for the year, with consumer spending at 1.9% and the inventory restocking cycle providing an upside surprise.
The deeper tension in the data sits between the inflation that AI is creating and the productivity it will eventually deliver. Electronics prices are up 27% year-over-year. Memory chip shortages show no sign of resolving. And yet productivity is running near 3%, business formation is historically strong, and the capital deepening from the AI buildout will, in time, generate the efficiency gains that bring inflation back toward target. The question is whether “in time” means one year or five.
For the consumer, the next few months represent the hardest stretch of the cycle: the tax refund cushion is spent, gasoline prices are still climbing, and sentiment sits at a 75-year floor. If spending holds up through the summer without fiscal support, it will tell us the labor market is strong enough to carry the load alone. If it does not, a December rate cut could arrive right on time. Either way, the economy’s growth potential remains intact, and the Warsh Fed will inherit a foundation that bends but does not break.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2605-27
In Part 1 of this series, we examined the legal frameworks and jurisdictional considerations that make Silent Trusts possible. In Part 2 of this series, the focus shifts from legal structure, jurisdiction and technical estate planning to intended outcomes, strategic decision points and multi-generational impact.
The first quarter Gross Domestic Product (GDP) report confirmed what the weekly data had been hinting at: the economy grew at a respectable 2% pace, underpinned by an artificial intelligence investment surge that added more than a full percentage point to growth. The punch line is that artificial intelligence (AI)-related imports subtracted just as much from the other side of the ledger, leaving the net contribution at zero and inflation as the only lasting residue of the boom.
Executive Summary
The GDP Report: Solid on Paper, Fragile Underneath
First quarter GDP grew at a 2.0% annualized rate, matching consensus, but the core of the economy held up better than the headline suggests. Real final sales to private domestic purchasers, which strips out inventories and trade, rose a stronger 2.5%, with IT equipment and software investment alone adding more than 1 percentage point, more than double the pace of its contribution from 2025. Consumer spending rose 1.6% annualized, held back by weather at the start of the quarter; the March personal spending data showed a solid rebound in real terms at quarter-end.
That strength owed much to the tax refund windfall, which through March and most of April outpaced the increased gasoline burden by a ratio of two to one. With refund season winding down and gas prices still climbing, the hit to consumer spending will become more evident starting in May.
The PCE price index rose 0.7% in March and 3.5% year-over-year, and with incomes not keeping pace, the personal saving rate dropped to 3.6%, its weakest since October 2022. The other GDP components were noisy: federal spending rebounded sharply from the record-long government shutdown, while a surge in AI-driven imports dragged net exports by more than a full percentage point.
The AI Paradox: Adding Everything, Netting Nothing
The most striking detail in the GDP report had nothing to do with the headline number. AI-related categories, taken together, added nothing to first quarter growth on a net basis. Investment in IT equipment and software surged, contributing more than a full percentage point, but AI-related imports surged by an equal amount, as most chips and electrical equipment are sourced abroad. The scale of the divergence is remarkable: imports of AI-related equipment have nearly doubled over the past year, while imports of everything else, excluding pharmaceuticals and gold, have fallen nearly 28% since “liberation day.”
For now, the AI boom appears inflationary rather than disinflationary, as rampant demand for memory chips and semiconductors has created a global shortage that is pushing up consumer electronics prices. Unless AI begins feeding through to productivity gains quickly enough to bring down unit labor costs, the Federal Reserve may need to keep policy settings tighter for longer to contain the goods inflation that the buildout is generating.
The Fed Goes Hawkish: December, Not June
The Federal Reserve left interest rates unchanged at the April FOMC meeting, as expected, but the details of the accompanying statement tilted in a hawkish direction. The statement upgraded inflation from “somewhat elevated” to “elevated,” and noted the increase was only “in part” due to energy prices, a signal that officials see broader forces at work. Three members dissented over language implying the next rate move would be a cut —further evidence of the deep split on the committee around the policy outlook. It is now more likely that the next rate cut will be in December rather than June, reflecting a stickier inflation outlook driven by the AI buildout, the passthrough of energy costs to core prices and lingering tariff effects.
This was almost certainly Jerome Powell’s last meeting as Federal Reserve chair, with the Senate Banking Committee advancing Kevin Warsh’s nomination; Powell has vowed to stay on the board as a governor until the Department of Justice investigation is “fully over.” It is likely that rampant AI-related demand for electronics and related equipment will keep core PCE inflation close to 3% over most of this year. The Employment Cost Index (ECI) offered some comfort, with year-over-year growth in compensation costs holding steady at 3.4%, the slowest pace since the second quarter of 2021 and a rate that remains consistent with the Federal Reserve’s 2% inflation target when paired with strong productivity growth.
The Consumer: Still Spending, but the Cushion Is Gone
The Conference Board’s measure of consumer confidence rose for the third consecutive month in April, reaching 92.8, buoyed by the ceasefire and the rebound in equity markets. Consumers’ year-ahead inflation expectations edged down to 6.1% from 6.2% in March, though they remain well above the 5.5% registered before the war.
The labor market differential, measuring the gap between those saying jobs are plentiful and those saying they are hard to find, improved to 7.5 points from 5.8. Yet beneath the improving headline, consumers reported fewer plans to purchase big-ticket items or spend on services, a signal that the oil price shock is beginning to alter spending behavior. The labor market remains the economy’s shock absorber. Initial jobless claims plunged 26,000 to 189,000 in the week ended April 25, well below expectations, and continued claims declined 23,000 to 1.785 million, with the four-week moving average at its lowest since May 2024. The March consumer spending rebound was genuine, but the tax refund tailwind that powered it is fading; with gas prices still rising, the drag on consumer spending will become visible starting in May.
Housing and Manufacturing: Mixed Signals, Persistent Constraints
Housing starts jumped 10.8% in March to a seasonally adjusted annual rate (SAAR) of 1.502 million, far above consensus, though building permits fell 10.8% to 1.372 million, signaling that the March pace will not repeat. Builders still need to work through an overhang of completed unsold homes that stood at 2009 levels earlier this year; mortgage rates have retraced about half the increase that followed the onset of the war, which should support some sales but will not unlock a sustained recovery in starts. Home price growth continued to decelerate, with the S&P CoreLogic Case-Shiller national index posting its slowest annual gain since June 2023 at 0.7% year-over-year, though base effects are set to turn more favorable starting with the March data.
On the manufacturing side, the ISM manufacturing index held steady in April, with broadening new orders and low customer inventories providing a constructive backdrop for future production. Factory employment, however, fell further into contraction, reinforcing signs of a nascent productivity upswing, while slower supplier deliveries pointed to supply chain bottlenecks forming around the closure of the Strait of Hormuz.
Final Thoughts
The first quarter confirmed what the weekly data had been suggesting: the economy is growing at trend, the AI buildout is both supporting and complicating the picture and the Federal Reserve has no reason to move until the data force its hand. It is now more likely to see a single rate cut in December, later than consensus but more dovish than current market pricing, which implies little change in rates over the coming years. Consumer spending is on track for growth of nearly 2% this year, but the composition makes it unusually fragile, with an outsized reliance on high-income households who benefit from tax cuts and wealth effects; a sustained stock market correction would hit spending harder than normal.
The Middle East situation is the primary source of uncertainty, though hard data signals remain benign. The deeper question is whether the AI boom that is keeping the Federal Reserve on hold will eventually deliver the productivity gains that make its own inflation manageable. That is a question measured in years, not quarters. In the meantime, the economy faces a summer stretch where the tax refund tailwind has faded, gas prices remain elevated and the labor market, while stable, is beginning to feel the leading edge of AI adoption through rising layoffs in the information sector. The consumer, running on fumes and a saving rate of 3.6%, will be the first to tell us if something has broken. So far, the answer is no. But the margin of safety is thinner than it has been in years.
Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2605-2
