In a relatively light week for traditional economic data, a mix of corporate earnings, business surveys, Federal Reserve minutes, and the latest read on the consumer from the University of Michigan helped paint an increasingly clear picture for investors. What emerges is an economy that is still moving forward but is doing so in an increasingly delicate balance with narrow pockets of strength—most notably companies tied to the artificial intelligence (AI) trade—offset by growing signs of strain, particularly from inflation and a weakening consumer backdrop.
On one side of the ledger, the AI buildout continues to demonstrate notable resilience. Chipmaking darling NVIDIA once again delivered results that exceeded expectations, reinforcing the durability of demand tied to next-generation computing infrastructure. Yet the muted market reaction suggests much of that strength had already been priced in. Even so, underlying investor enthusiasm remains firm. That was evident in the midweek attention surrounding a potential SpaceX IPO, which served as another reminder that capital continues to gravitate toward innovation, scale, and long-duration growth opportunities.
But beyond that narrow leadership, the broader economic picture remains far less uniform—and increasingly strained under the weight of rising energy prices and inflation. Walmart’s results highlighted that challenge, particularly from rising fuel prices, with management noting that the company has largely absorbed those costs for now. However, that ability may not persist. If energy prices remain elevated, the risk is that those costs begin to flow more broadly into consumer prices later this year. That’s particularly important given the growing strain already evident among lower- and middle-income households, where sensitivity to both higher prices and borrowing costs remains most acute, while higher-income households have benefited from the wealth effect of higher stock prices.
Read more: Rising Interest Rates: Why The Narrative Fails Against The Data
Despite ongoing signs of broadening, the markets and economy remain in a bifurcated state—divisions that have become more visible in the data. The May preliminary S&P Global Purchasing Managers’ Index (PMI) showed an economy that is still expanding but with clear signs of imbalance. Input costs rose at the fastest pace since late 2022, and selling prices accelerated alongside them. At the same time, demand softened and hiring slowed. In other words, the economy continues to move forward—but at a slower pace and with renewed inflation pressure.
These risks of slower growth and rising inflation were brought into focus by Chris Williams, chief business economist at S&P Global Market Intelligence: “Demand also looks set to cool further in response to rising prices. Firms’ costs have jumped higher at a pace not seen since the energy price shock of 2022 and are being passed on to customers in the form of sharply higher selling prices. The survey price gauges therefore indicate that inflation looks set to rise further just as the economy cools.”
In another clear warning sign of economic strain, the latest University of Michigan consumer sentiment report released last week showed that consumer sentiment fell to a record low of 44.8 in May, with attitudes around both current conditions and expectations reaching record low levels. At the same time, year-ahead inflation expectations rose from 4.7 percent in April to 4.8 percent in May, a notable jump from the 3.4 percent reading seen in February 2026 prior to the start of the Middle East conflict. Long-run inflation expectations climbed from 3.5 percent in April to 3.9 percent this month. Put simply, consumers are not only strained but increasingly concerned inflation will persist.
These tensions were also evident in the minutes from the Federal Reserve’s final meeting under Jerome Powell, which showed a committee still concerned about inflation and increasingly divided over the appropriate path forward. This meeting was particularly notable given that four Federal Open Markets Committee (FOMC) members dissented from the decision—the most since October 1992—with three dissenting based upon language they felt signaled an easing bias at a time when inflation risks remain elevated. The meeting minutes showed this concern wasn’t limited to three FOMC members, rather that many participants wanted to drop the easing bias from the statement with a majority saying that further firming would be likely if inflation stayed persistently above the central bank’s 2 percent target.
This rare level of dissent comes at a pivotal moment for the Federal Reserve. On Friday, Kevin Warsh was sworn in to replace Powell as chair. The known inflation hawk, who served as a Fed governor during the financial crisis, inherits a divided central bank attempting to balance moderating growth and elevated inflation. This is a tricky combination because it increases the odds that the Fed remains cautious at a time when more interest rate-sensitive parts of the economy are already under pressure.
Markets have adjusted to that reality, with investors now assigning greater odds to additional tightening than to near-term easing. Currently the market is pricing in a 63 percent chance of a hike by year end 2026. If that repricing continues, upward pressure on Treasury yields could persist, adding further strain to housing, small businesses, and other parts of the economy that have been most exposed to higher borrowing costs. While AI-related investing has done much of the heavy lifting in the economy over the past few years; the question remains whether it will be able to move forward given its increasing sensitivity from the growing debt required to fund large-scale AI investment.
Taken together, last week’s developments reinforced what we continue to view as the nearer-term defining features of the current environment: a U.S. economy and market that remains in a delicate balance between the potential for slower growth but with rising inflation, with both being supported by a narrow set of powerful secular tailwinds, while broader conditions remain challenging. AI-related spending continues to help underpin growth, earnings, and market sentiment, but that support is increasingly being asked to offset the potential for future weakness tied to inflation, higher rates, and a more financially stretched consumer.
As always, prioritizing diversification and staying the course can help investors navigate both narrow and broad markets alike, reducing reliance on any single theme or sector.
Wall Street wrap
Growth begins to slow as inflation rises
The latest S&P Global PMI data suggests the economy is continuing to expand, though the momentum beneath the surface is becoming increasingly uneven. The composite PMI held steady at 51.7 in May, unchanged from last month’s 51.7, signaling modest overall growth. However, that stability masked a notable divergence across sectors. “May data recorded only modest growth of U.S. business activity as demand was again squeezed by a further spike in prices, while jobs were cut as firms worried over rising costs and the economic outlook,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Manufacturing strengthened, rising to 55.3 from 54.5, while services slipped to 50.9 from 51.0. Aside from a 49.8 reading in March and 50.8 during last April’s “Liberation Day” concerns, this marks the weakest services reading since November 2023, highlighting a clear cooling trend in the largest part of the economy. “On average, over the past three months order book growth has slowed to its weakest for two years, and a boost from precautionary stock building due to concerns over further price hikes and supply delays will not last forever,” Williamson added.
The composition of growth is now shifting from services-led expansion toward manufacturing, with factory activity posting its strongest gain in four years. That strength, however, appears less organic. Much of the pickup is being driven by customers building inventories ahead of expected price pressures tied to the Iranian conflict and broader supply disruptions. Factories are seeing rising demand for inputs, with purchases increasing at the fastest pace since April 2022, while supplier delivery times have lengthened for nine consecutive months, reaching the most pronounced delays since August 2022. This has intensified cost pressures, with input price inflation surging to its highest level since November 2022, including an 11-point jump in manufacturing input prices, the largest increase since June 2022. In contrast, the services sector remains sluggish, with new business inflows rising only modestly after declining in April and leaving the sector on track for its weakest calendar quarter since late 2023.
Labor market and pricing data further reinforce the idea of a fragile backdrop. Overall employment declined for the second time in three months, with job losses accelerating to the fastest pace since August 2024. This was driven primarily by services, where employment fell at the second-fastest pace since May 2020, while manufacturing payrolls rose at the strongest rate in 11 months to meet short-term demand. At the same time, inflation pressures are intensifying. Average prices for goods and services rose at the fastest rate since August 2022, with goods prices hitting their highest increase since September 2022 and services inflation climbing to a 10-month high. The composite measure of input and output prices is now at its highest level since 2022, reflecting broad-based cost pressures across both sectors.
Builder sentiment is stabilizing but remains weak
Builder sentiment improved modestly in the latest NAHB/Wells Fargo Housing Market Index, rising to 37 from 34, but it remains well below 50, meaning more builders still see conditions as poor than good. The components also firmed: Current single-family sales rose to 40 (from 37), future sales expectations increased to 45 (from 42), and buyer traffic improved to 25 (from 22). Even with that improvement, NAHB Chief Economist Robert Dietz emphasized that higher long-term interest rates continue to restrain demand and that affordability remains a major constraint even as some Midwest markets show relative strength.
The hard data echoed that mixed picture. Housing starts slipped to 1.465 million in April, down from a slightly revised 1.507 million in March. Single-family starts fell 9 percent to 930K, underscoring ongoing rate sensitivity in the owner-occupied market. At the same time, multifamily (buildings with five units or more) starts rose to 529K, pointing to stronger momentum on the rental side and a rotation in where activity is showing up.
Permitting strengthened overall, with building permits rising to 1.442 million from 1.363 million, but the composition again matters. Single-family permits (a forward indicator) fell 2.6 percent to 872,000, suggesting single-family construction could remain under pressure. Meanwhile, multifamily permits jumped 21 percent to 570,000 (from 468,000), signaling that incremental supply is increasingly being driven by multifamily development rather than a rebound in single-family building.
The week ahead
Tuesday: The Conference Board’s U.S. Consumer Confidence May report is set to publish at 10:00 a.m. EST, serving as a key test of whether the still resilient consumer is beginning to fade, especially as rising rates and inflation pressures continue to weigh on sentiment. April’s headline reading inched up slightly to 92.8 from 92.2 in March. We’ll be watching to see if that pattern continues.
Thursday: The Bureau of Economic Analysis (BEA) will release the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, at 8:30 a.m. EST, providing a critical read on whether price pressures remain elevated or are beginning to ease. As the Fed places greater weight on PCE than CPI, markets will be highly sensitive to this report, with any upside surprise reinforcing expectations for rates to stay higher for longer, while signs of cooling inflation could support the case for policy easing.
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
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