The economy's latest puzzle

Right now, the economy is like your friend who’s insisting they’re all good, but you can feel that something is off.

Today, the Personal Consumption Expenditures price index came in hotter than expected—but only by a hair.

• PCE rose 0.1% for the month, making the annual inflation rate 2.3%, above the Fed’s projected goal of 2%.
• Core inflation, which excludes food and energy costs, jumped 0.2% over the month and 2.7% year over year, slightly higher than forecasts.
• In addition, spending fell 0.1% for the month, roughly meeting expectations, while personal income declined 0.4%—a far worse metric than the projected gain of 0.3%.

Meanwhile, the S&P 500 hit a new all-time high today, despite the report revealing some cracks under the economy’s surface. After all, if consumers are spending less, and personal income is falling, how great can things really be?

To further complicate the picture, the final reading of consumer confidence numbers also arrived today, and showed that the consumer sentiment index reached a four-month high in June—increasing to 60.7 from 52.2 from a month prior. In addition, shoppers said they only expect prices to increase 5% over the next year, lower than the 6.6% they forecast in May.

What does this all mean for you?

Despite the market’s rally and consumers’ optimism, uncertainty is still the name of the game.

“With employment growth slowing, income gains moderating, and the inflationary effects of tariffs building, households are likely to become more cautious with their spending over the summer and into the fall,” explained EY-Parthenon Senior Economist Lydia Boussour in a note.

Investors will eagerly be awaiting the Federal Reserve’s next interest rate announcement on July 30 for some clarity on monetary policy and a look at what the pros think will happen next. “The dovish FOMC members favoring two rate cuts in 2025 will view this data as supporting gradual policy accommodation to move toward a less restrictive stance,” added Boussour.

But some analysts are brushing off the economic anxiety, and are more bullish than ever. “We think the [S&P 500] recovery makes sense, considering that most large-cap companies should weather the tariffs reasonably well. In fact, we think the upcoming 2Q earnings season will once again highlight the resilience of corporate profits,” explained Head of US Equities at UBS Global Wealth Management David Lefkowitz.—LB