U.S. Economy This Week: The Fundamentals Are Looking Much Better

Inflation has eased, federal revenue is finally outpacing spending, and retail sales are rising. Too bad the Federal Reserve wants to kill the expansion via high interest rates. Who can stop the Fed?

Guest post by economist Robert Genetski, Ph.D.

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The main news for April and early May was positive. It shows the economy continued to growing in April and May, with spending up at a 5 percent to 6 percent rate and inflation in the 2 percent to 3 percent vicinity.

A major concern, however, is that all three interest rates are above their 10- and 50-day averages (see chart). Technically, this implies further upward pressure on rates, which would tend to slow the economy.

The Trump Administration hints at upcoming trade agreements with the UK, Japan, India, and China. Look for additional tariff deals in the weeks ahead.

Also expect the 10 percent across-the-board tariffs to remain as Trump seeks to convince investors about the advantages of investing in America.

The good news is that despite the imposition of tariffs, inflation appears to have been contained in April. Both the total and core CPI increased by 0.2 percent in April. They are the first indication that Trump may be correct about tariffs not adding to inflationary pressures.

There was also good news for April wholesale prices, where core final demand prices fell by 0.5 percent percent, led by a sharp decline in costs of services. The prices for final goods rose by 0.5 percent. Year-over-year and for the six months ending in April, wholesale inflation remains in the range of 2 percent to 3 percent, respectively.

Another potential sign of good news appeared in the Treasury’s April revenue and spending data. These data are highly erratic, so we must be cautious in drawing hard and fast conclusions. Even so, Treasury data for February through April show revenues up 10 percent from the same period a year ago and spending up just 1 percent. The spending restraint is either the first sign DOGE has contained federal
spending, or it is a statistical aberration.

In other indicators, April auto sales were down slightly from March but up sharply over the past three months. The same is true for for the Fed’s April manufacturing index—down slightly from March but up at a healthy 4 percent annualized rate over the past three months.

Retail sales data were revised extensively. The bottom line is that April sales were reported up at a 6 percent annual rate from the first quarter and 5 percent above a year ago.

Weekly unemployment data also were relatively stable in early May.

The main negative news was a sharp drop in the May Homebuilders’ Survey. It fell to 34 percent, signifying a serious depression in the new home market.

There is little significant news scheduled for next week. The one barely significant item is Thursday’s advance May S&P business survey. The April survey showed both manufacturing and service businesses with readings just above 50, which is break-even. Forecasts call for similar readings.