Jobs Data, Spending Figures, Show Worrying Side of a Resilient Economy

The stock market is hot. The job market isn’t. (Brandon Bell/Getty Images)

The U.S. economy is looking in fairly good shape as the second quarter glides to a close, with reasonably modest inflation, record-high stocks, and solid GDP growth.

Emerging weakness in the labor market, however, is starting to test whether that resilience can extend into the back half of the year. Hiring is slowing, claims for unemployment benefits are rising, and consumers are retrenching, perhaps in response to uncertainty over tariffs and the government’s effort to cut spending.

Personal spending in the U.S., in fact, declined by the most since the start of the year last month, according to data from the Bureau of Economic Analysis published on Friday.

While inflation ticked modestly higher in May, according to the bureau’s personal consumption expenditures price index, the Federal Reserve’s preferred gauge, it remains within a range that suggests muted price pressures from President Donald Trump’s tariff strategy.

“Inflation is still not spiraling out of control,” said Bret Kenwell, U.S. investment analyst at the online trading platform eToro.

“Personal income unexpectedly fell and while personal spending was less drastic, it too took an expected dip,” he said. “This data echoes what we saw in this week’s final Q1 GDP reading. In no scenario do we want to see the consumer weaken as we go into the summer.”

The Commerce Department’s latest estimate of first-quarter gross domestic product, released Thursday, showed an annualized contraction of 0.5%. That is a slowdown from the 2.4% advance over the final three months of last year, though the Atlanta Fed’s real-time tracker suggests a second-quarter rebound of 2.9%.

Data from the job market, however, are starting to show some worrisome trends. On the positive side, Labor Department figures published Thursday showed a modest pullback in the number of Americans filing for first-time unemployment benefits over the week ended on June 21. The headline tally was 235,000.

St. Louis Fed data, however, show the four-week average for initial claims has risen 15% since the start of the year. It hit the highest level since the summer of 2023 over the week ended on June 14.

The Kansas City Fed’s benchmark index of labor-market conditions, meanwhile, was pegged at the lowest levels since 2021 earlier this month.

Labor Department figures also that reflect that the number of people seeking to extend their jobless benefits into a second week and beyond rose by 37,000 to 1.974 million in the week ended on June 14. That too was the highest since 2021.

Taken together, the data suggest people who were recently laid off are finding it harder to secure a new job as hiring slows and companies wait for clarity on tariffs and the health of the domestic economy.

“The labor market remains largely frozen with little hiring or firing,” said Heather Long, chief economist at Navy Federal Credit Union. “Anyone looking for a job this summer is going to have a tough time.”

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said that over the week ended on June 14, the reference period the Bureau of Labor Statistics uses for its monthly nonfarm payroll estimate, continuing claims rose by 81,000 over the previous month. It was the highest total since late 2022.

“With no reason to expect corporate hiring plans to suddenly improve, we retain our forecast that the unemployment rate will rise to 4.8% by the end of this year,” he said. Unemployment was 4.2% in May.

That, he argues, will likely compel the Federal Reserve into at least three quarter-point rate cuts over the next six months.

The CME Group’s FedWatch Tool puts the odds of a July reduction at just 20%, but matches Tombs’ forecast for a fed-funds rate of 3.5% to 3.75% by the end of the year.

Still, others suggest that a smaller supply of labor resulting from President Donald Trump’s immigration policies will cap the increase in the headline unemployment rate, which is measured against the total labor force. That could slow the Fed’s response.

“Foreign-born workers accounted for four fifths of labor force growth from 2020 to 2025,” said Bill Adams, chief economist for Comerica Bank in Dallas.  “If job growth slows but labor force slows at the same time, the unemployment rate could hold steady or even fall,” he added

“The U.S. economy would probably have to experience significant outright job losses for the job market to pressure the Fed to cut rates, and that seems unlikely,” he said.

Write to Martin Baccardax at martin.baccardax@barrons.com