Consumer Confidence Rebounds and Income Grows, Even as Business Investment Slows and Q1 GDP Contracts

Weekly Economic Review: May 30, 2025

Business equipment orders drop most since October; consumer confidence rebounded amid US-China trade truce; Q1 GDP revised up but still showed contraction on weaker spending, higher trade impact; price pressures eased as income growth remained strong.

Key Summary:

This week’s economic data releases began with reports showing a decline in April orders for durable goods and core capital goods – business equipment excluding aircraft and defense. The drop appears to reflect businesses taking a cautious approach to capital investment as they assess demand prospects amid uncertainty surrounding tariffs and tax policy.

Consumer confidence rebounded sharply in May, posting its largest monthly gain in four years, as expectations for the future for income, the economy, and the job market improved across all age, income, and political groups. Optimism also rose around purchasing big-ticket items and taking vacations, and consumers’ outlook for the stock market strengthened. However, perceptions of the current job market continued to weaken. Over one-third of consumers saved for future expenses, while about a quarter used savings or delayed major purchases. Nineteen percent made early purchases to avoid tariffs, with higher rates among households earning over $125,000.

The second estimate for first-quarter gross domestic product (GDP) showed a 0.2% contraction in economic growth – an improvement from the initially-reported 0.3% decline in April. This marks the first quarterly decrease since Q1 2022. The revised data revealed that consumer spending grew at a slower pace, revised down to 1.2% from the initial 1.8%, and net exports made a slightly larger negative contribution. The modest upward revision in GDP was driven by stronger business in-vestment and increased inventory accumulation.

In April, consumer spending declined, particularly on goods such as motor vehicles and parts, clothing and footwear, and recreational items. The drop in spending was in part a return to normal after the surge in front-loaded purchases in March, as consumers anticipated tariffs taking effect in April. This pullback came despite continued strong income growth. Heightened economic uncertainty and declining consumer spending led consumers to increase their savings, pushing the savings rate to its highest level in nearly a year.

Personal and disposable incomes exceeded expectations, continuing their strong upward trend. A portion of this growth was driven by government transfer payments; even excluding these, how-ever, personal income rose at a healthy pace.

Inflation remained subdued in April, with both headline and Core Personal Consumption Expenditures (PCE) aligning with expectations. Many businesses have yet to pass rising costs onto consumers, though retailers like Walmart and Macy’s have signaled upcoming price increases to protect profit margins. While the annual headline PCE is nearing the Federal Reserve’s 2% target, the Core PCE remains elevated at 2.5%.

Let’s examine in more detail the advance durable goods, the PCE price index, personal income and personal spending data announced last week.

Advance Durable Goods:

The U.S. Census Bureau released its advance report on durable goods, which are items such as appliances and aircraft designed to last at least three years. Orders for durable goods, a key leading indicator of business and consumer confidence as well as future demand and production plans, fell by 6.3% in April, following a 7.6% increase in March. This decline, largely driven by a drop in commercial aircraft orders, marked the steepest monthly decrease since January 2024 and was slightly better than the market’s expected 7.8% drop. Despite the monthly dip, durable goods orders were up 3.3% year-over-year in April, though this was a slowdown from the 10.0% annual gain recorded in March.

Core capital goods orders, which exclude aircraft and defense-related items and serve as a key indicator of business investment, declined by 1.3% in April after a modest 0.3% rise in March. This was the largest monthly drop since October, and came in below the anticipated 0.2% decline. On a yearly basis, core capital goods orders rose 1.0%, down from a 2.4% increase in March, marking the weakest annual growth in four months. Shipments of core capital goods edged down 0.1% in April, following a 0.5% gain in March, aligning with market expectations.

Consumer Confidence:

The Conference Board reported that its Consumer Confidence Index rose by 12.3 points in May to 98, exceeding expectations and marking the largest monthly gain in four years. This rebound follows April’s near five-year low and reflects broad-based improvement across all age, income, and political groups.

The Expectations Index—which measures short-term outlooks for income, business, and labor market conditions—jumped 17.4 points to 72.8 in May, recovering from April when the lowest level since October 2011 was recorded. Despite the surge, it remains below the recession-warning threshold of 80. Consumers expressed less pessimism about business conditions and job prospects over the next six months, and showed renewed optimism about future income. Sentiment toward the present situation also improved, although views on current job availability declined for the fifth consecutive month.

Present labor market perceptions continued to weaken, with the labor market differential (the gap between those saying jobs are plentiful versus hard to get) slipping to 13.2 in May from 13.7 in April. However, with the stock market rebounding in May, more consumers now expect further gains over the next year. Tariffs remain a top concern, with many citing rising prices and potential negative economic impacts.

Consumers’ outlook on their family’s financial future improved, and the share expecting a recession in the next 12 months declined from a two-year high. Plans to purchase homes, cars, vacations, and big-ticket items like appliances and electronics increased. Additionally, consumers indicated a greater willingness to spend on services across nearly all categories.

In a special survey, over one-third of consumers (36.7%) reported setting aside money for future expenses. Approximately 26.6% of consumers tapped into their savings to cover the cost of goods and services, or delayed making major purchases. Additionally, 19% said they made purchases in advance to avoid potential tariff increases—a figure that was notably higher among households earning more than $125,000 annually (26%).

PCE Price Index & Personal Income and Outlays::
The Bureau of Economic Analysis reported the latest statistics on the PCE price index, personal income, and personal spending:

PCE Price Index::: In April, the headline PCE price index rose by 0.1%, in line with expectations and up from no change in March. The monthly increase was driven by a 0.1% rise in both goods and services prices. Food prices declined by 0.3%, while energy prices increased by 0.5% month-over-month. On a year-over-year basis, headline PCE inflation rose 2.1%, down from 2.3% in March and below the market forecast of 2.2%. The annual increase was largely due to a 3.3% rise in services prices, partially offset by a 0.4% decline in goods prices. Over the year, food prices rose 1.9%, while energy prices dropped 5.6%.

The Core PCE index, which excludes food and energy and is the Federal Reserve’s preferred inflation gauge, rose 0.1% in April, matching both the revised March figure and market expectations. On an annual basis, Core PCE inflation came in at 2.5%, in line with forecasts and down from the revised 2.7% in March (previously 2.6%).

Personal Income::Personal income rose by 0.8% in April, exceeding both market expectations of 0.3% and the revised March figure of 0.7% (up from 0.5%). The April increase was primarily driven by gains in wages and salaries, proprietors’ income, and government social benefits. These gains were partially offset by a decline in personal dividend income. The rise in government social benefits was largely attributed to increased Social Security payments, reflecting disbursements related to the Social Security Fairness Act.

Disposable income, a key driver of consumer spending, continued to show strong growth, rising by 0.8% in April after a 0.7% increase in March. Both nominal and real disposable income (adjust-ed for inflation) recorded their strongest gains since January 2024. Real disposable income rose by 0.7% in April, maintaining the same pace as the previous month. Personal savings reached $1.1 billion in April, while the personal saving rate climbed to 4.9%, up from 4.3% in March. This marks the highest saving rate since May 2024.

Personal Spending: Personal spending, or consumer spending, rose by 0.2% in April, following a stronger 0.7% in-crease in March. The April figure matched market expectations and was mainly driven by a 0.4% rise in spending on services. This gain was partially offset by a 0.1% decline in goods spending, with durable goods falling by 0.3%. Within the services category, the largest contributors to growth were housing and utilities, healthcare, and food services and accommodations. On the goods side, the decline was broad-based, with notable decreases in spending on motor vehicles and parts, recreational goods and services, and clothing and footwear.

Conclusion:
The stock market posted its strongest monthly performance since November 2023, primary driven by encouraging inflation data, a surging tech sector, and growing optimism over the prospect of less severe tariffs. Meanwhile, the bond market remained relatively stable, with Treasury yields holding steady amid signs of cooling inflation and continued investor caution.

At the close of the week, yields on the 2-year, 5-year, and 10-year Treasury notes stood at 3.89%, 3.96%, and 4.41%, respectively—down 11, 12, and 10 basis points from the previous week. Market expectations remain unchanged, with two 25-basis-point rate cuts fully priced in for 2025, totaling 50 basis points. No rate cut is anticipated at the June FOMC meeting, and the prob-ability of a 25-basis-point cut in July is just 28%, suggesting limited likelihood of near-term action. The first fully priced-in 25-basis-point cut is projected in September. An additional cut is expected in December, bringing the total projected rate reductions for the year to two.

Next Week’s Economic Calendar:
Markets will be closely monitoring several key economic indicators this week for insights into the economy’s direction. On Monday, focus will be on the release of the ISM Manufacturing Index for May. Tuesday brings the final durable goods report for April and the JOLTS (Job Openings and Labor Turnover Survey). The ISM Services Index follows on Wednesday, with reports on nonfarm productivity and unit labor costs due Thursday. The week concludes with Friday’s May nonfarm payrolls report, the main highlight for investors, analysts, as well as the Federal Reserve. Nonfarm payrolls are projected to increase by 130,000 in May, following a gain of 177,000 in April. Mean-while, the unemployment rate is expected to hold steady at 4.2% for the third consecutive month.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

_______________________________________________________________________

All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.