First quarter profits once again came in better than expected, with the outlook for the second quarter and full year also positive.

Highlights for This Week Include:

The preliminary May business surveys suggest a significant pickup in private sector activity midway through the second quarter, consistent with an ongoing economic expansion.

Consumer sentiment, while muted, remains consistent with continued economic growth. The Fed’s most recent Beige Book report is also consistent with modest economic growth.

First quarter profits once again came in better than expected, with the outlook for the second quarter and full year also positive. Encouragingly, major U.S. stock indexes remain near all-time highs, and further economic growth supports the outlook for profit growth. This suggests stocks remain well supported.

May Business Surveys Show Significant Improvement

Late each month we get an important early read on that month’s private sector business activity through preliminary business surveys (includes about 85% of final responses). The S&P Global Flash U.S. Composite PMI shot up in May to the highest level since April 2022, suggesting a significant pickup in private sector activity midway through the second quarter. The PMI has advanced over the past three months by the most in a year as both services and manufacturing activity improved from the prior month, with a more pronounced jump in services growth.

The Flash Services PMI rebounded to the highest level in a year. It was the first gain in four months and the most since February 2023. In addition to stronger business activity, firms reported a jump in new orders near the fastest pace in a year. The Flash Manufacturing PMI reflected a more modest but still positive gain after being mostly in contraction territory since November 2022. Factory output increased for the fourth consecutive month, and the pace of growth picked up from the prior month.

Optimism about the 12-month growth outlook increased in both services and manufacturing, near the historical average. Respondents noted elevated uncertainty related to higher-for-longer interest rates, elections, and geopolitical conflicts.

Consumer Sentiment Muted but Consistent With Economic Growth

The Conference Board’s Consumer Confidence Index rebounded in May, with its first increase in four months. Confidence is still well below its high earlier in this cycle and is lower than pre-pandemic. Nevertheless, the current level remains consistent with continued economic expansion.

Both the present situation and consumer expectations improved. Current business and labor market conditions remained in growth territory. Fewer respondents said jobs were hard to get, which is consistent with a continued low unemployment rate. Purchasing plans for the next six months were mixed by major category, but generally remained subdued.

Fed Beige Book Consistent With Modest Economic Growth

The Beige Book is a Federal Reserve System publication about current economic conditions across the 12 Federal Reserve Districts. It is published eight times a year and is intended to characterize the change in economic conditions since the last report.

The most recent report noted national economic activity continued to expand from early April to mid-May. Most Districts reported slight or modest growth, while two noted no change in activity. Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers. Tight credit standards and high interest rates continued to constrain lending growth – indicating the Fed’s higher interest rate policy is having its intended effect.

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