Business Conditions Monthly March 2026

The March 2026 AIER Business Conditions Monthly (BCM) points to a mixed, still uneven economic outlook. Forward-looking data improved from the prior month, though not convincingly; measures of current activity were somewhat firmer; and lagging indicators remained the strongest of the three categories. At the same time, at least one data point in the coincident group appears unusually large relative to the surrounding series, so the month’s results should be read with some caution.

LEADING INDICATOR (50)

The Leading Indicator came in at 50, with six of 12 components improving, none unchanged, and six deteriorating. Positive movement was spread across several demand-sensitive and forward-looking series. US Average Weekly Hours All Employees Manufacturing SA rose 0.2 percent. US Initial Jobless Claims SA fell 5.1 percent and counted as a positive after inversion. Conference Board US Leading Index Manufacturers’ New Orders Consumer Goods and Materials increased 0.7 percent. Conference Board US Manufacturers New Orders Nondefense Capital Goods Ex Aircraft advanced 4.1 percent, US New Privately Owned Housing Units Started by Structure Total SAAR rose 4.9 percent, and Adjusted Retail and Food Services Sales Total SA increased 1.8 percent.

Those gains were offset by weakness elsewhere. University of Michigan Consumer Expectations Index fell 8.7 percent, while Conference Board US Leading Index Stock Prices 500 Common Stocks declined 3.4 percent. Inventory to Sales Ratio Total Business eased 0.8 percent, United States Heavy Trucks Sales SAAR dropped 2.4 percent, and Debit Balances in Customers Securities Margin Accounts decreased 2.6 percent. The 1-Year to 10-Year US Treasury Yield Spread widened 43.0 percent, but because that measure is one of the inverted series, it was scored negatively.

On balance, the leading data suggest an economy that is not uniformly weakening, but still lacks broad-based thrust. Strength in orders, housing, and retail activity was offset by softness in sentiment, equities, and selected financial indicators.

ROUGHLY COINCIDENT INDICATOR (58)

The Roughly Coincident Indicator registered 58, with three of six components improving, one essentially unchanged, and two declining.

The strongest contributions came from Conference Board Coincident Manufacturing and Trade Sales, up 1.5 percent, and Conference Board Consumer Confidence Present Situation SA, up 4.5 percent. US Employees on Nonfarm Payrolls Total SA also posted a large increase in the file and scored positively. Conference Board Coincident Personal Income Less Transfer Payments was effectively unchanged, rising just 0.05 percent. Offsetting those gains, US Industrial Production SA declined 0.5 percent, and US Labor Force Participation Rate SA edged down 0.2 percent.

The roughly coincident data were somewhat better than the leading group in March, but the picture remains uneven. Current activity measures show some resilience, though the unusually large payroll increase in the workbook may reflect a reporting or data-entry issue and may overstate the apparent strength of the group.

LAGGING INDICATOR (83)

The Lagging Indicator stood at 83, with five of six components improving and one declining.

Most lagging series moved in a direction associated with continued underlying firmness. US CPI Urban Consumers Less Food and Energy YoY NSA increased 5.6 percent. US Commercial Paper Placed Top 30 Day Yield rose 1.5 percent. Conference Board US Lagging Commercial and Industrial Loans advanced 0.7 percent, and US Manufacturing and Trade Inventories Total SA rose 0.9 percent. Conference Board US Lagging Avg Duration of Unemployment fell 1.6 percent and was scored positively because it is inverted. The only declining component was Census Bureau US Private Construction Spending Nonresidential SA, which slipped 0.1 percent.

Overall, the lagging data continue to depict an economy still carrying momentum from prior conditions. Even so, because lagging indicators tend to confirm rather than anticipate turning points, their relative strength does not fully offset the more divided message coming from the leading and coincident indicators.

DISCUSSION (April/May 2026)

April’s inflation data suggest that the Iran conflict is pushing headline prices higher, but the broader inflation picture remains more contained than the top-line figures imply. Headline CPI rose 0.64 percent in April following March’s 0.87 percent increase, while headline PCE climbed 0.66 percent in March, driven largely by gasoline prices, which surged more than 20 percent amid the conflict. Beneath the surface, however, core inflation remained comparatively restrained: core CPI rose 0.38 percent, though much of that reflected a temporary jump in rents tied to delayed Bureau of Labor Statistics housing surveys following last fall’s government shutdown. Excluding that shelter distortion, core inflation would have been materially softer, while core PCE — the Fed’s preferred gauge — slowed to 0.29 percent as weaker goods inflation offset firmer service categories such as health care and air transportation. Producer prices point to mounting supply chain pressures rather than overheating demand, with headline PPI jumping 1.4 percent in April as higher fuel, freight, and manufacturing input costs rippled through the economy and firms increasingly moved to protect margins. Still, some PPI components feeding into core PCE, including weaker portfolio management fees tied to March’s equity selloff, are likely to restrain near-term inflation readings.

Labor market data continue to point to an economy that is cooling gradually rather than deteriorating outright, with hiring holding up better than expected even as broader measures of labor demand soften beneath the surface. Nonfarm payrolls rose a stronger-than-expected 115,000 in April, above both consensus expectations and estimates of roughly 50,000 jobs needed to stabilize unemployment, though hiring slowed from March’s upwardly revised 185,000 pace. Private-sector hiring accounted for the gains, while government payrolls continued to edge lower. Most notably, trade, transportation, and utilities emerged as the largest source of job creation, adding 60,000 jobs and overtaking health care as the dominant contributor to employment growth — a development consistent with recent improvements in freight activity, purchasing managers’ surveys, and regional manufacturing data that suggest an emerging recovery in portions of the industrial economy. At the same time, job gains elsewhere were less convincing: manufacturing slipped back into contraction, professional and business services cooled, and information and financial activities shed jobs, likely reflecting a combination of cyclical moderation and structural adjustments tied to automation and artificial intelligence. Wage growth remained subdued at 0.2 percent in April, helping to contain labor-cost pressures, though a modest increase in the workweek pushed weekly earnings higher and supported household income.

Beneath the stronger headline payroll figures, however, several indicators suggest labor-market conditions continue to soften incrementally. The unemployment rate edged up to 4.34 percent in April from 4.26 percent, even as labor-force participation declined, with household-survey employment falling and the number of unemployed rising — a reminder that the pace of job creation required to stabilize unemployment may be materially higher than Federal Reserve assumptions imply. March JOLTS data reinforced the view of slower but still-stable labor demand: job openings declined modestly to 6.87 million, layoffs increased slightly, and the vacancy-to-unemployment ratio remained below pre-pandemic norms, signaling reduced tightness and limited inflationary pressure from labor markets. Yet workers showed somewhat greater confidence than expected, with the quits rate ticking up to 2.0 percent. Weekly jobless claims likewise continue to portray a labor market marked more by stability than stress. Initial claims remained historically low through May, consistently below year-earlier levels, while continuing claims stayed contained and the insured unemployment rate held steady at 1.2 percent. Even as AI-driven restructuring increasingly reshapes hiring patterns — particularly in technology and white-collar occupations — layoffs remain concentrated rather than systemic, suggesting employers are adjusting staffing cautiously rather than retrenching broadly. Taken together, the data point to a labor market that remains resilient in the near term but is gradually losing momentum, supporting expectations that the Federal Reserve will remain on hold for now before potentially easing policy later in the year if unemployment continues to drift higher.

Business activity data continue to point to an economy in expansion, though momentum is becoming increasingly uneven as firms contend with rising costs, softer demand in some areas, and cautious hiring. The ISM Services PMI eased modestly to 53.6 in April from 54.0 — still consistent with moderate economic growth — but underlying details softened meaningfully. New orders fell sharply to 53.5 from 60.6, likely reflecting the fading of earlier pull-forward demand ahead of expected price increases, while employment remained in contraction for a second straight month despite an improvement from March. At the same time, price pressures remained intense and broad-based, with the services prices index holding at 70.7 — among the highest readings since 2022 — as firms increasingly cited diesel, gasoline, fuel surcharges, and tariff-sensitive materials as sources of cost pressure. Manufacturing also remained in expansion territory, with the ISM Manufacturing PMI unchanged at 52.7, though the composition of activity was less encouraging. New orders improved modestly, but export demand weakened, production failed to accelerate materially, and factory employment slipped further into contraction. Supplier deliveries slowed, likely reflecting Iran-war-related disruptions and tighter logistics conditions, while the manufacturing prices-paid index surged to 84.6 — its highest level in four years — underscoring mounting pipeline inflation. Taken together, the April ISM reports suggest growth continues but is increasingly constrained by rising input costs, softer demand, and more selective hiring, reinforcing expectations that the Federal Reserve will remain on hold in the near term.

Against a backdrop of still-expanding but increasingly cost-constrained business activity, sentiment data point to growing caution among both firms and households. Small-business optimism remained subdued in April, with the NFIB Small Business Optimism Index edging up only marginally to 95.9 as elevated uncertainty and weakening sales expectations offset modest improvements in profitability and hiring plans. The share of owners expecting stronger real sales over the next quarter fell to its lowest level in a year, underscoring concern that rising prices — particularly for fuel and other inputs — may increasingly weigh on customer demand, while modest improvements in profits appear to be giving some firms room to absorb higher costs through margin compression rather than fully passing them through to consumers. Capital spending and hiring intentions improved slightly but remained historically subdued, reflecting caution around future demand even as labor quality continues to rank among firms’ most persistent challenges. Consumers, meanwhile, grew notably more pessimistic in May, with the University of Michigan sentiment index falling to a record low of 44.8 as elevated gasoline prices and uncertainty surrounding the Iran conflict intensified concerns about the cost of living. Inflation expectations moved sharply higher, with households expecting prices to rise 4.8 percent over the next year and 3.9 percent annually over the next five to ten years, suggesting growing concern that inflation pressures may spread beyond fuel. Measures of current conditions, future expectations, and household finances all deteriorated to record or near-record lows, even as labor-market expectations remained comparatively resilient — helping explain why spending has thus far held up better than confidence. Taken together, the data suggest an economy in which sentiment is weakening faster than underlying activity, with both businesses and households becoming increasingly cautious even as growth continues to hold up in the near term.

Consumer spending data, meanwhile, suggest that households continue to absorb higher costs without materially retrenching, though the composition of spending increasingly reflects pressure from elevated fuel and food prices. Nominal retail sales rose 0.5 percent in April, but with more than 40 percent of the increase driven by higher gasoline expenditures, while retail sales excluding gas rose a more modest 0.3 percent. Even so, underlying demand remained firmer than anticipated: control-group retail sales — a key GDP input — increased a solid 0.5 percent, while restaurants, grocery stores, and online retailers led gains, suggesting consumers continue to spend despite rising cost pressures. Elevated tax refunds and household wealth effects appear to be cushioning activity for now, helping prevent a more meaningful pullback in discretionary spending. Big-ticket purchases, however, show clearer signs of moderation. Light vehicle sales cooled to a 15.92 million annualized pace in April, reflecting affordability pressures from higher gasoline costs, though sales remained above the first-quarter average and growing interest in fuel-efficient and electric vehicles points to some underlying resilience. Housing activity also remained subdued, with existing home sales rising only marginally as elevated mortgage rates, stretched affordability, and rising inventories weighed on demand, while home price appreciation slowed to just 0.9 percent year over year. Consumer spending looks likely to remain resilient in the near term, though higher energy costs are increasingly reshaping spending patterns and weighing on interest-sensitive purchases.

Even as consumer confidence weakens and spending patterns become more selective, business investment and production data suggest firms entered the second quarter on firmer footing than sentiment alone would imply. Industrial production rose a stronger-than-expected 0.7 percent in April following a revised March decline, driven primarily by durable goods output, with motor vehicle production surging 5.3 percent and accounting for roughly one-third of the headline gain. Manufacturing output increased 0.6 percent, business equipment production rose 1.5 percent, and stronger activity in transportation equipment, metals, minerals, agricultural equipment, and electronics pointed to relatively healthy capital spending and industrial demand despite higher energy costs and elevated uncertainty. Softer output in consumer goods excluding autos and energy, alongside declines in mining activity and oil-and-gas drilling, suggests more price-sensitive sectors remain cautious. Productivity data reinforce the picture of a business sector continuing to adapt rather than retrench: nonfarm productivity rose at a 0.8 percent annualized pace in the first quarter, lifting year-over-year growth to 2.9 percent — the strongest reading in two years and consistent with the possibility that technology investment and early AI adoption are beginning to appear in aggregate data. Output growth continued to outpace hours worked, while unit labor costs rose just 2.3 percent annualized, sharply below the prior quarter and easing to 1.2 percent year over year, reinforcing evidence that labor markets are not generating broad inflationary pressure. US firms appear willing to invest and expand production selectively, while stronger productivity growth is helping offset labor costs and cushion the economy against rising input prices and softer consumer sentiment.

The broader policy and financial backdrop points to an economy that continues to expand but faces growing constraints from tighter monetary conditions, elevated inflation risks, and mounting fiscal concerns. Credit availability remains broadly supportive, with the Federal Reserve’s latest Senior Loan Officer Opinion Survey showing only modest tightening in business lending standards, largely stable consumer credit conditions, and some easing in commercial real estate lending terms. Demand for credit, however, has softened in several consumer categories, suggesting borrowing appetite, rather than supply, may increasingly limit activity. The Federal Reserve has recently shifted further in a hawkish direction. Minutes from the April FOMC meeting showed diminishing support for eventual rate cuts, growing discomfort with maintaining an easing bias, and a majority of policymakers indicating further tightening could become appropriate if inflation remains persistently above target. By mid-May 2026, market implied policy rates showed rate market participants placing a 60 percent chance on a one-quarter increase in the Fed Funds rate by December 2026. Energy-related inflation from the Iran conflict, tariffs, supply disruptions, and resilient labor-market conditions have reinforced the Fed’s caution, leaving policymakers in no hurry to ease.

Financial markets have increasingly aligned with this higher-for-longer outlook, though concerns now extend beyond inflation alone. Treasury yields surged in May, with the 30-year yield briefly exceeding 5.2 percent — its highest level since 2007 — as investors reassessed both inflation persistence and the sustainability of US fiscal dynamics. Mounting deficits, rising debt-service costs, and heavier Treasury issuance are increasingly pushing investors to demand greater compensation for holding long-term debt, particularly as higher rates themselves threaten to worsen fiscal pressures. The unusual leadership of the long end of the curve in the recent selloff suggests markets are increasingly pricing fiscal risk alongside monetary restraint. Taken together, the policy outlook points to a Federal Reserve likely to remain on hold for an extended period, balancing elevated inflation risks against the possibility that tighter financial conditions and rising borrowing costs eventually weigh more heavily on growth.

In May 2026, the US economy confronts a difficult but not wholly unfavorable balancing act: robust enough to continue expanding, yet increasingly pressured by higher energy costs, tighter financial conditions, and record levels of policy uncertainty. Headline inflation has been pushed higher by the Iran conflict and energy prices, yet underlying inflation pressures remain more contained than surface-level readings admit; labor markets, consumer spending, and business activity continue to expand despite growing indications of moderation. Households and firms appear to be absorbing higher costs for now — supported by accumulated wealth, stable credit availability, productivity gains, and selective business investment — though confidence has deteriorated notably, and more interest-sensitive sectors such as housing, autos, and portions of discretionary spending are beginning to soften. At the same time, rising long-term Treasury yields, mounting fiscal concerns, and increasingly cautious Federal Reserve rhetoric suggest financial conditions may become a more meaningful headwind in coming quarters, particularly if elevated energy prices persist or inflation broadens beyond fuel and supply-chain-related categories.The near-term growth path remains one of slower but continued expansion rather than outright contraction, with the US economy appearing more vulnerable to policy missteps or external shocks than to an immediate cyclical downturn.