May in Review
Last month, inflation moved higher, with Consumer Price Index (CPI) inflation rising to 3.8% year over year, up from 3.3% the prior month. The increase was driven primarily by energy prices, particularly gasoline, reflecting ongoing disruptions tied to the Middle East conflict.
Labor market data were broadly stable. The unemployment rate remained unchanged at 4.3%, wage growth increased modestly to 3.6%, while job growth continued to be geographically concentrated in the Southern states, particularly cities in Texas. On an occupational basis, healthcare once again led job gains, especially in home health services, a trend we have consistently highlighted. Business formations increased during the month, with notable strength in e commerce and digital services firms. Manufacturing activity also improved, particularly in semiconductors, IT equipment, and natural gas–related energy infrastructure.
Construction spending rose modestly, driven primarily by residential renovations rather than new single family construction. New multifamily construction edged higher, while nonresidential construction largely stagnated as stronger public sector spending offset weaker private investment.
Data centers remained the standout category, with demand for computing capacity also supporting increased power related construction. Labor productivity posted solid gains, rising 2.9% in early 2026.
After a decade of weak productivity growth prior to the pandemic, the post 2023 acceleration remains one of the more encouraging structural developments for the U.S. economy. While artificial intelligence may be contributing at the margin, the improvement appears to reflect a broader set of forces, with AI’s more transformative effects likely to emerge over a longer horizon.
Turning to geopolitics, the Iran conflict increasingly points to a change in the region’s status quo. While active fighting and missile launches slowed during the month, the U.S.–Iran ceasefire/stalemate remained fragile, with the risk of renewed attacks persisting. Negotiations over Iran’s uranium stockpile continued, with Tehran proposing to retain its existing material, a position the U.S. is unlikely to accept. There are indications that Iran used the ceasefire to rebuild military and broader state capabilities. Additionally, Iran has closed the Strait of Hormuz and is now actively engaging neighboring nations to impose transit tolls. Taken together, these factors imply a new status quo and a blueprint Iran could use in future conflicts. Prior to the conflict, closing the Strait was a theoretical risk; it is now an actual risk event, one that has demonstrated to Tehran the potential global impact of such actions. Moreover, Iran has learned that by extending a ceasefire, it can rebuild munitions and extend a conflict or position itself for a future one. The events of this month demonstrate that this dynamic is now an operational reality with global economic consequences, fundamentally altering the strategic equation in the region.
Regional alignments further complicated the outlook. Pakistan emerged as a central, but at times contradictory, actor. On the one hand, Pakistan has played a mediating role in U.S.–Iran talks, while also allowing Iran to move aircraft to Pakistani airbases for protection. On the other hand, Pakistan deployed 8,000 troops and a squadron of fighter aircraft to Saudi Arabia under the Saudi–Pakistan defense pact signed last year, potentially positioning itself to counter Iran.
Separately, ahead of the U.S.–China summit in Beijing, Chinese Foreign Minister Wang Yi held talks with his Iranian counterpart. While Iran may have been in the background of the summit, China’s messaging—particularly President Xi’s pointed remarks on Taiwan as a potential source of conflict with the U.S.—suggested that Beijing’s primary objective was to position Taiwan as the dominant strategic issue in U.S.–China relations and to signal its importance to Washington.
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