June in Review
Consumer inflation accelerated to 4.2% in May, the fastest pace in several years, driven largely by higher energy costs. But inflation has also begun to increase beyond energy prices. Areas such as financial services, transportation, and healthcare all experienced notable cost increases, alongside an acceleration in technology-related goods tied to AI investment. Inflation is now outpacing wage gains and household purchasing power is declining, which is likely to weigh on consumer spending.
Price pressures are even more pronounced earlier in the supply chain, with wholesale inflation outpacing consumer inflation. Wholesale inflation is extending beyond energy costs into inputs such as manufacturing materials and construction supplies. These rising upstream costs are likely to either pass through into consumer prices or strain business profit margins.
Even with a higher cost of living, consumer spending remained resilient. Households continued to increase spending at a solid pace, though much of that growth reflects higher prices rather than increased consumption. Energy is a clear example, where households reduced usage but still spent more. A similar pattern is evident in discretionary areas like dining, where consumers appear to be pulling back on activity even as total spending rises.
Labor market conditions improved in May, with broad-based job gains and a stable unemployment rate. Hiring has picked up momentum in recent months and has become more evenly distributed across industries. Leisure and hospitality posted particularly strong gains, likely reflecting preparation for the FIFA World Cup, which began in mid-June. Construction and manufacturing also saw increases, supported by activity tied to infrastructure, technology investment, and defense production.
Manufacturing activity improved in May. Factory output moved higher, with gains linked to technology, energy, and national security. Areas such as semiconductors, consumer tech, energy exports, and defense-related equipment saw the strongest momentum, while more legacy sectors, like textiles and paper products, declined. Auto production also moved higher compared to last year’s average.
Overall construction spending rose slightly last month, driven by gains in the single-family housing market. Nonresidential construction remained flat at the top line, but this stagnation masked growth in several subsectors. Data center construction continued to outpace the market, followed by strong performance in chemical manufacturing, amusement and recreation facilities, and power plants. These growth areas were offset by a sharp decline in computer and electronic manufacturing. This space saw a wave of activity over the last few years, mostly funded by federal incentives designed to bring AI chip plants to the U.S. The first round of projects is winding down before the next wave likely picks up.
Shipping conditions in the Strait of Hormuz have begun to stabilize following renewed talks between the United States and Iran. Senior officials from both countries agreed to a temporary pause in hostilities and outlined a path toward a broader agreement, which has already eased global supply chain pressures. The most visible impact has been a partial return of shipping activity through the Strait, which had been effectively shut down during the height of the conflict. Traffic remains below normal levels but has recovered from near-zero conditions in recent months. However, despite diplomatic improvements, the longer-term outlook remains uncertain and major topics remain unresolved, particularly around nuclear oversight. For now, military activity has paused and supply chains have improved somewhat, but the situation remains fragile.
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