May 2024 Stonemark Market Commentary

Consumers Feeling the Heat

As summer approaches, we are observing some notable changes in the economic landscape. Over the past few years, American consumer spending has shown remarkable strength. Even during the Covid-19 pandemic, buoyed by government stimulus, spending surged ahead. This resilience continued in the face of rising inflation. However, it now appears that the anticipated financial pressure on consumers, as predicted by many economists and the Federal Reserve, may be starting to take effect.

In May, U.S. retail sales were unexpectedly flat, indicating a potential shift in consumer behavior. With prices continuing to climb, consumers are increasingly prioritizing essential items and cutting back on discretionary spending. This summer, we’re seeing a trend towards more budget-conscious choices, with families opting for store brands like Great Value and Signature Select instead of premium name brand options for their barbecues.

In the following sections, we will explore key economic indicators from May, including trends in job creation, inflation, and the slowdown in GDP growth. We will also discuss what these developments might mean for the economy as we head further into the summer months.

Economic Data

The Labor Department's latest report shows U.S. job growth slowed more than expected in April, with the unemployment rate rising to 3.9% from 3.8% in March. Nonfarm payrolls increased by 175,000 jobs, the fewest in six months, and 22,000 fewer jobs were created in February and March than previously reported. Economists had expected 243,000 new jobs, but April's gains were below the past year's monthly average of 242,000.

Job growth in April was diverse. The healthcare sector added 56,000 positions, leading employment gains as companies continued to recover from pandemic-related losses. Social assistance added 31,000 jobs, transportation and warehousing increased by 22,000 jobs, and retailers hired 20,100 more workers. There were modest gains in construction, government, leisure and hospitality, and manufacturing.

However, professional and business services saw minor job losses, continuing a trend of declining temporary help staffing, which has dropped in 24 of the last 25 months. Despite 87,000 people entering the labor force in April, household employment only rose by 25,000, leading to an uptick in the jobless rate. Additionally, part-time employment rose by 135,000 due to the inability to find full-time jobs. Economists attributed some of the employment divergence to difficulties in measuring recent immigrants in household surveys.

As job growth slowed, inflation remained steady in April, leading to weakened consumer spending. The streak of higher-than-expected inflation ended, but the consumer price index (CPI) still rose 3.4% year-over-year. Core prices, excluding food and energy, climbed 3.6% annually. Shelter costs, including rents, increased by 0.4% for the third consecutive month, and gasoline prices surged by 2.8%. These two categories accounted for over 70% of the CPI increase. Meanwhile, food prices remained unchanged, with supermarket prices dropping 0.2%, led by a 7.3% decline in egg prices and decreases in meat, fish, fruits, vegetables, and nonalcoholic beverages.

The Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 0.3% in April and 2.7% year-over-year, maintaining the same annual pace as in March.

Due to persistently high prices, the U.S. economy grew more slowly in the first quarter than previously estimated. Gross domestic product (GDP) grew at a 1.3% annualized rate from January through March, down from the initial estimate of 1.6% and significantly slower than the 3.4% pace in the last quarter of 2023. This slowdown suggests that the Fed's strategy of cooling the economy with high interest rates is impacting consumer behavior, though it remains uncertain if the trend of weakening inflation will continue.

Corporate profits fell for the first time in a year, dropping 0.6% to $3.39 trillion from the fourth quarter's record high. Despite some easing last year, inflation remains a significant challenge for the Fed, delaying expectations for interest rate cuts and raising concerns about a potential stagflation environment.

Economic Forecasts

"Another decline in the U.S. LEI confirms that softer economic conditions lie ahead," said Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board. "Deterioration in consumers’ outlook on business conditions, weaker new orders, a negative yield spread, and a drop in new building permits fueled April’s decline."

Although the six-month and annual growth rates of the LEI no longer signal an imminent recession, they still indicate significant challenges to growth. Elevated inflation, high interest rates, rising household debt, and depleted pandemic savings are expected to continue weighing on the U.S. economy in 2024. Consequently, real GDP growth is projected to slow to under 1 percent between the second and third quarters of 2024.

May was a challenging month for consumers, despite equity indexes reaching new all-time highs on Wall Street, the pinch is starting to be felt on Main Street. The U.S. economy is teetering on the brink of a recession, with several warning signs that demand investor attention. By the end of May, Atlanta Fed economists halved their expectations for second-quarter GDP growth from 3.4% to 1.8%. Additionally, manufacturing activity, a crucial economic growth indicator, showed signs of slowing. New manufacturing orders contracted in May, and overall manufacturing activity has now declined for 18 straight months, according to the Institute for Supply Management.

The pain is especially evident in credit card data. The San Francisco Fed reports that households exhausted the last of their $2.1 trillion in pandemic-era savings by the end of the first quarter. This depletion has forced many to rely on credit cards to cover expenses, leading to increased debt struggles. TransUnion estimates that since April last year, 440,000 credit card holders have been downgraded to subprime status, with delinquent accounts rising at rates last seen in 2011. Car loan repayments are also lagging, pushing some to sell their vehicles. According to Kelley Blue Book, used car listings increased by 6% in May compared to a year earlier, while a study by S&P Global Mobility found the average age of vehicles in the U.S. is now 12.6 years, up more than 14 months since 2014.


The Fed has been navigating a delicate balance between lowering inflation and maintaining growth for two years. While some believe a soft landing is still achievable, others are less optimistic. New York Fed economists estimate a 52% chance of a recession within the next 12 months. The key issue for the overall economy is how many consumers will struggle to make ends meet. Household balance sheets have weakened. As we move into the summer, consumers are hoping they won’t be overwhelmed by the economic heat.