US economic indicators offer conflicting signals
- It was widely expected that the conflict in the Middle East would have negative consequences for the US economy. However, based on the employment reports for March and April, the economy still appears to be doing well. On the other hand, job growth in April was concentrated in just a handful of sectors, suggesting that the economy is not generating across-the-board job growth. Let’s look at the details:
The US government publishes a monthly report on employment, based on two surveys: one is a survey of households and the other a survey of establishments. The establishment survey found that, in April, 115,000 new jobs were created, down from 185,000 in March. Both were strong numbers, especially compared to the weak pace of job growth in 2025.
However, job growth in both months was relatively concentrated only in a handful of industries. In March, half of the growth in employment was attributable to health care and social assistance. In April, all the job growth was attributable to just three categories: health care and social assistance, courier and messenger services, and retail trade. All other categories had either very low or negative job growth. For example, employment fell in April in manufacturing, information services, and financial services, and increased by only 7,000 in professional and business services. Federal government employment fell as well.
Meanwhile, the report also found that workers’ average hourly earnings were up 3.6% in April from a year earlier. The figure stood at 3.4% in March. The April figure was the second-lowest increase in earnings since May 2021. This comes at a time when inflation is modestly accelerating, which means that real (inflation-adjusted) earnings are likely decelerating. If, in the coming months, inflation rises further due to the conflict in the Middle East or due to other reasons, it will likely mean a loss of purchasing power for US households, which, in turn, could contribute to slower economic growth.
The separate survey of households, which also measures self-employment, found that the size of the labor force declined in April and that employment declined even more. The labor force participation rate fell slightly, hitting the lowest level since September 2021. Plus, the unemployment rate remained steady at 4.3%. This report signals a softening in the job market, especially as evidenced by the low participation rate.
The US government also reported on labor productivity: Labor productivity (output per hour worked) increased at an annualized rate of 0.8% between the fourth quarter of 2025 and the first quarter of 2026. This was the lowest rate of growth recorded since the first quarter of 2025. On the other hand, labor productivity was up 2.8% from a year earlier, suggesting strong growth. Most of this growth took place in the second and third quarters of 2025, which, in turn, was mostly due to rising productivity in the technology sector. Productivity trends are best assessed over many quarters. Thus, the deceleration in the first quarter is not, by itself, sufficient to suggest a change in direction.
- While the jobs report does not yet suggest that the conflict in the Middle East is causing the economy to weaken, the latest report on consumer sentiment does suggest some concerns. The University of Michigan’s index of consumer sentiment fell to a record low in April—slightly below the previous low reached in June 2022. That period is similar to the current one in that both have witnessed relatively high prices of gasoline. Moreover, the University of Michigan said that “about one-third of consumers spontaneously mentioned gasoline prices and about 30% mentioned tariffs. Taken together, consumers continue to feel buffeted by cost pressures, led by soaring prices at the pump.”
It should be noted, however, that indices of consumer sentiment are not always a good predictor of consumer behavior. The index in March was also historically low, but the US government reported that retail spending was relatively healthy.
- Since the start of April, the S&P 500 index of US equities has increased by more than 12%. Yet, half of that growth is attributable to the shares of just five technology companies: Alphabet, Nvidia, Amazon, Broadcom, and Apple. Excluding those five companies, the S&P 500 increased only 6%. Moreover, if the 500 companies on the S&P index are weighted equally rather than by market cap, the index has not gone up at all since the start of the Middle East conflict began in late February. This level of concentration is not typical.
It seems equity investors are betting that the conflict in the Middle East will not materially undermine the strong earnings seen in the technology sector. Meanwhile, forecasts for earnings at non-tech companies have been downgraded by analysts. The problem, however, is that, if the conflict in the Middle East is prolonged, thereby potentially leading to higher oil prices, it could result in tighter monetary policies in major economies. That, in turn, would likely mean higher bond yields and higher borrowing costs for companies. Given that the massive investment by tech companies in data centers is largely funded by debt issuance, this could have a negative impact on the tech sector.
