Written by Steve Andrews
Business Formation and Investment Trends
Entrepreneurial activity remains strong, with new business applications averaging approximately 5 million annually over the past three years. Investment is increasingly concentrated in the private sector, with growth led by smaller, more agile firms. This trend is contributing to productivity gains and helping offset concerns about the potential impact of AI on employment.
At the same time, AI is fueling an infrastructure expansion. Spending on data centers, power generation, and advanced manufacturing continues to rise, with high-tech equipment investment increasing 9.2% year-over-year.
Manufacturing and Services Activity
Manufacturing activity has improved steadily, with the ISM Manufacturing Index rising for five consecutive months. Key forward-looking components -- new orders and production -- indicate continued expansion.
Order backlogs are also increasing, suggesting that demand remains strong and may drive future hiring. The services sector, which represents the majority of U.S. economic activity, continues to expand as well, reinforcing the overall growth outlook.
Consumer Spending: Stable Despite Sentiment Pressures
Consumers remain sensitive to higher prices, and sentiment has weakened. However, spending has held up well. Retail sales (excluding gasoline, autos, and food services) are up 7%–8% year-over-year in recent weeks. Spending growth has outpaced income gains, supported in part by a lower savings rate, which has declined from 5.3% in 2024 to 2.6% currently.
Household wealth remains elevated, particularly among older consumers, supporting continued spending across the economy.
Interest Rates and Monetary Policy Outlook
Expectations for interest rates have shifted modestly. Markets now anticipate one or two small rate increases over the next year, reflecting continued economic growth and persistent inflation.
Despite this shift, borrowing conditions remain manageable. Historically, the economy has performed well even in higher-rate environments, and current conditions suggest that modest increases are unlikely to significantly slow growth.
Housing and Corporate Performance
Housing activity remains mixed, though existing home sales rose 3.2% last month, marking the strongest monthly performance this year. First-time buyers represented 35% of purchases, the highest share since 2020.
Corporate fundamentals remain strong. Profits increased 12% year-over-year in the first quarter, and margins in non-financial industries are improving. These trends continue to support equity market performance.
Outlook: Continued Expansion with Key Watch Points
The U.S. economy continues to demonstrate resilience. Growth is supported by strong employment, steady consumer spending, and solid business investment.
Key areas to monitor include inflation trends, interest rate policy, and global developments that could influence market conditions. If inflation stabilizes and growth remains steady, the current expansion is likely to continue.
