Viewpoint
May 01, 2026 | 15:09
Not Yet Running on Empty
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Not Yet Running on Empty |
| Businesses are riding high with record corporate profits as a share of the economy and soaring stock prices. Many businesses are currently facing lower average tariff rates than they did last year and look forward to $166 billion in tariff refunds to support their bottom lines, bolstering their ability to reinvest. We saw the result in the Q1 GDP report. Equipment and intellectual property investment soared 17.2% and 13.0% annualized in the first three months of the year. Gross private investment added a whopping 1.5 ppts of the 2.0% a.r. GDP growth—that share has been rising for three consecutive quarters even as consumers’ contribution to GDP growth sags (Chart 1). |
| There are tantalizing signs that businesses are starting to pull the trigger on new hires, too. Jobless claims fell to an ultra-low 189k in the last week of April, their lowest since 1969 (Chart 2). A clear downtrend in jobless claims is emerging with the 4-week average sinking to 208k, well below the 12-month 222k pace. And, the weekly ADP employment report is flagging a measurable pick-up in private sector hiring. In the second week of April, the average weekly private sector payroll increase was around 39k jobs, or 157k on a 4-week basis. This could be setting up the markets for an upside payrolls surprise in next week’s April employment report. We expect a sturdy 70k (above the consensus forecast for +60k) gain after March’s 178k jump, which was the biggest since December 2024. Despite some high-profile layoffs in the tech sector, employers are largely holding on to their workers, and the unemployment rate has stabilized around 4.3%. This is helping households look past the rise in gasoline prices to keep spending. Inflation remains a serious concern for consumers, and for the Fed that is now six years into its attempt to bring inflation back down to target. Average retail gasoline prices hit $4.39/gallon this week, up 57% from its January low. Here in California where I sit, average prices are well over $6.00/gallon. The ISM Manufacturing Price Index soared to 84.6 in April—up 26 points since the end of last year and the highest level since April 2022, around when the Fed first started hiking rates. PCE inflation heated up as expected in March with both the headline and core readings moving well above 3.0% y/y for the first time since 2023 (Chart 3). The Fed may be back to square one, having to pivot once more toward a neutral policy stance and seriously contemplate the possibility of raising interest rates again. The personal income and spending report revealed consumers still had some gas in their tank in March even with the spike in gasoline and energy prices. Real consumer spending increased a solid 2.9% a.r. despite the war breaking out, just a bit below February’s 3.3% gain. Don’t expect this performance to be repeated anytime soon. Personal income growth is already struggling to keep pace with the rise in prices. Real incomes (excluding transfer payments) have declined in four of the past six months with the yearly growth rate turning negative for the first time since 2022. The gap between real consumer spending and real income growth remains at its widest since 2022 (Chart 4). We forecast a more sustainable real consumer spending growth rate of around 1.6% in Q2. So, not yet running on empty, but more dark clouds are forming on the horizon as inflation pressures mount. |
The Drama of Powell’s Final Post-Confab Presser |
| This week (April 29), the Senate Banking Committee sent Kevin Warsh’s nomination for Fed Chair to the Senate floor for a full vote, which is expected before May 15 when Jay Powell’s term as Chair ends. On the same day the Senate committee voted on Warsh, the FOMC voted on monetary policy ahead of Powell’s last post-meeting press conference. The events delivered some drama, despite unmoved policy. The FOMC kept rates unchanged, with the target range for fed funds at 3.50% to 3.75%. This was the third straight pause after three consecutive 25 bp cuts during the final three confabs of 2025. Governor Miran dissented for the sixth consecutive meeting (covering his entire tenure) in favor of a 25 bp rate cut for the third straight time, after favoring 50 bp actions in 2025. This dissent had no drama. The Fed also kept its forward guidance unchanged with the phrase: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” Toggling in and out the “the extent and timing of” modification, this is the language used since rate cuts began in September 2024. Whenever the modification has been absent, it has signaled a cut next meeting (Sept./Nov. 2024; Sept./Oct. 2025). Otherwise, it has signaled a cut as early as next meeting or more likely in a meeting down the road. This was akin to an ‘easing bias’. Cue the drama. The notion of altering the forward guidance or easing bias was already discussed in the March meeting. This week, three FOMC voters (and likely other non-voters) favored altering the language and dissented accordingly. Cleveland President Hammack, Minneapolis’ Kashkari, and Dallas’ Logan “supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.” Given the increased risk of faster inflation from the oil shock, they preferred a more neutral statement to convey that rate cuts were no more likely than hikes. The 8-to-4 vote represented the most dissents in 34 years (via Bloomberg). More drama unfolded amid Powell’s swansong presser. He said he would remain on the Board of Governors after his term as Chair ends “for a period of time, to be determined.” Typically, those in his position would resign. “I have said that I will not leave the Board until this investigation is well and truly over, with transparency and finality, and I stand by that. I am encouraged by recent developments, and I am watching the remaining steps in this process carefully.” The DoJ has dropped its criminal investigation into Powell. They have “provided assurances that they will not reopen the investigation unless there is a criminal referral from the Fed’s Inspector General. And, absent that referral, if they do appeal the recent court decision [that the initial subpoenas were illegal], they would not seek as part of that appeal to restart the investigation or send new subpoenas” at this point. Powell is a bit skeptical, perhaps fostered by waiting for the Supreme Court ruling on the President’s ability to fire Governor Cook. Once Warsh is confirmed, Governor Miran will likely give up his seat to make room for the new Chair. Awaiting Warsh will be a committee divided between standing pat or moving further away from rate cuts and an ex-Chair keeping a “low profile” but still commanding attention. The drama looks to continue. |
All In On Economic Resilience |
| Real GDP grew a solid 2.0% annualized in Q1, with AI-driven investment again leading the way. A 43% surge in business spending on information processing equipment, 184% spike in software investment, and 22% jump in data-center construction added 1.4 ppts to growth, or two-thirds of the total. This marked the largest contribution on record dating back to 1959, courtesy of the AI boom. According to the Wall Street Journal, four Big Tech companies (Google, Amazon, Microsoft and Meta) alone reported $130 billion in capital expenditures in Q1, partly to build AI data centers, up 71% from last year. Meta and Google also raised their capital spending plans for this year. Moreover, AI adoption is spurring other firms to buy computers, servers, and software in a race to remain competitive. Real business spending on IT gear, software, and data center has risen a combined 24% in the past year. In the past five quarters, these three components have grown an average of 33%, 15%, and 22%, respectively, contributing 0.55 ppts, 0.34 ppts, and 0.03 ppts to (annualized) real GDP growth. (The latter figure is not a misprint, but a reflection of the still-tiny size of data center construction relative to the overall economy, at less than 0.2%.) The average contribution of the three components in the past five quarters is 0.93%, accounting for nearly one-half of total economic growth. However, much of the equipment used to build the AI backbone is not produced domestically. Taiwan is a dominant supplier of microchips, while Vietnam and other Asian countries are major providers of computers and servers. In fact, imports of computers, peripherals, and parts surged 123% annualized in the latest quarter. While precise data on their contribution to real GDP growth are unavailable, a rough estimate suggests they subtracted just over 1 ppt. This would offset most of the net contribution from business spending on IT gear, software and data centers. However, tariff front-running may have juiced imports early this year ahead of new duties expected to be imposed under a different trade statute. Overall, business spending on computer hardware, software and data centers is providing a meaningful direct lift to GDP growth, though one that may be significantly dampened by imports. Of course, not all of this spending is tied to AI; firms routinely update computer systems for one. Nevertheless, AI is also driving demand for non-IT related equipment, including electric power generation, while creating high-paying jobs and wealth. Over the long term, it should lift labor productivity and potential economic growth. The AI boom is a key reason the economy weathered the trade war much better than feared and may provide some ongoing resilience during the Iran war. |
Crude Oil Outlook: Staying the Course |
| The energy forecasting community remains on tenterhooks as the Middle East conflict continues to drag on. The Strait of Hormuz is still effectively closed as both Washington and Tehran remain reluctant to give ground on a potential peace deal. This largely explains why crude oil prices, both on the spot and futures markets, have backed up in recent days as concerns of an extended stalemate and, moreover, a potential resumption of fighting have risen. The front-month WTI futures contract is now hovering just over Rightly or wrongly, it appears that the majority of oil market participants (producers, end-users and speculators) are still of the view that the conflict will come to an end and/or the Strait will open up relatively soon. This is mainly because the Trump Administration is seen as wanting to bring gasoline prices down ahead of the U.S. mid-terms election in November. This view is reflected in the futures market, which shows WTI coming down to To help cope with this uncertainty, we decided from the start of the conflict to take a weighted average of possible scenarios (benign to extreme), rather than focus on a most likely potential outcome, to help formulate our forecast for the price of WTI. This strategy has served us quite well so far with WTI’s average of Looking further out, the crude oil bears, if there are any of them left, may have received a bit of a boost from the UAE’s unexpected decision to leave OPEC/OPEC+. However, even when the Strait is finally reopened, the UAE’s ability to pump without restraint is unlikely to send crude oil prices tumbling down on its own. This is because the UAE only has the capacity to supply an additional 800 kb/d in the short run, and further out, another 700 kb/d in 2027, which would bring total output to around 5.0 mb/d (vs. pre-war of 3.6 mb/d). In the context of total pre-war global oil supply of 107.1 mb/d, this is not a huge boost, and any surplus could be adjusted for by the rest of OPEC+. Though in practice, this likely means that Saudi Arabia will have to shoulder a greater share of potential cuts if the cartel feels compelled to curtail supply once again. Key Takeaway: It’s become quite apparent that hammering out a (long-lasting) peace agreement is going to take time and will likely be accompanied by more twists and turns. One should expect crude oil prices to continue to swing wildly in the coming days/weeks. |
