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Economic Monitor – Weekly Commentary
by Eugenio Alemán

Not a good report on personal income and spending in May

June 27, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The U.S. economy seems to be surviving on fumes today; that is, a strong Q2 print will show a very strong economy just because importers bought everything under the sun during the first quarter of the year, and the retrenchment during the second quarter is undoing the damage done to the economy during the first quarter. However, there was very little in today’s report that could be translated into “the economy remains strong,” as argued by Chairman Powell during the press conference after the June FOMC meeting.

It is true that personal income was much better than personal consumption, as a one-off increase in government transfers in April pushed this measure down in May. This one-off was the biggest reason for the decline in disposable personal income in May and is expected to recover in June, provided that employment remained strong during the month. We will know this on Thursday of the coming week. But for now, the reversal in net exports during the second quarter of the year will give markets some reasons to remain positive on the prospects of economic activity.

However, the weakness observed during the first and second quarter of the year in personal consumption expenditure and after the publication of the final revision to real GDP during the first quarter of the year, is going to put economic growth on thin ice during the third and fourth quarter of the year. Our forecast already includes these assumptions, but it means that the economy will remain fragile during the second half of the year. Thus, the importance of the labor market will remain key for economic growth during the rest of the year.

Short week but potentially consequential for the economy

Next week is a shortened week, but the data could be consequential for decision makers, both in the markets and especially for monetary policymakers. Less than a week after the FOMC’s unanimous decision on rates in June, two Federal Reserve Governors indicated that they could be in favor of a rate cut as soon as July. Of course, they qualified their view by adding “if inflation continues to behave and/or to prevent further weakening of economic activity.” Whether they are pitching in to compete for the Fed Chairman position next year or because they really believe what they are saying, that’s a different issue.

As the July Federal Open Market Committee meeting approaches, Chairman Powell’s job is going to become more difficult, as he tries to direct his colleagues toward another unanimous decision, one that probably does not include a reduction in rates. However, by then, we will probably have more clarity on tariffs, plus one more inflation report, as the July 8 tariff extension period ends. It is also possible that the tariff decision is extended. Thus, there is plenty of time for other Fed members to join the July interest rate reduction bandwagon. We still believe that this is an unlikely event, but we will have to wait for more clarity. The July FOMC meeting is scheduled for July 29-30. Furthermore, the next meeting of the FOMC does not occur until mid-September, so a lot of things can happen during the summer that could put even more pressure on FOMC members to act.

But before getting there, next week we will get several important data points that have the potential to change markets’ expectations as well as policymakers’ minds. On Tuesday, we get the ISM Manufacturing PMI, which we expect to have remained in contraction but very close to the 50-demarcation point between contraction and expansion. This is going to give us some more clues on the industry’s prospects going forward, as we saw a very strong durable goods orders number during May, which has the potential to move the needle for the manufacturing industry.

On Thursday, we have several very important data releases, with nonfarm payrolls, the unemployment rate and the ISM Services PMI. We expect nonfarm payrolls to come in at 120k while the ISM Services is expected to have gone into expansion in June after falling below the 50-demarcation point in May. If either of these data points is weaker than the markets are expecting, there could be increased noise regarding the future of economic activity.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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