US Activity Update: Labor Market Continues to Strength - 6/5/2026
Composite Activity +0.21σ since May 29 — Labor + Services drove the pick-up. Mfg restocking intact, AI capex still anchors the cycle, Hormuz risk tilts inflationary rather than recessionary. October rate hike + 1 additional rate hike by 2027H1 is the new base case.
This is the second edition of a broader overhaul of the US Activity Monitor so they can be more scalable, adaptive, and support more rapid updates. There may be small discrepancies during the transition, especially in some labor measures, due to seasonal adjustment and methodological changes. Please reach out to macrosuite@employamerica.org with any feedback, requests, or concerns.
Our composite index jumped 0.21σ since our May 29 Update. Detailed discussion will be below the takeaways section.
The pickup from the previous update was driven by labor and services. The May jobs report was the main driver – leading to a 0.37σincrease in our real activity index.
The pickup in Manufacturing held up – evidence for our view that an inventory restocking cycle is a tailwind to growth.
ISM PMIs for new orders for both manufacturing and services picked up in May while the employment surveys were still sub-50.
There has been increasing chatter that we are undergoing a true resurgence in manufacturing. We are reluctant to go that far – we still believe this is an inventory restocking story but there are also real headwinds from tariffs and the Hormuz closure.
The composite Non-Residential Index slightly decreased from the previous update, driven by a deceleration in the nonresi construction employment series. Housing continues to look weak.
The levels are still positive, the deceleration is likely stemming from baked effects. January, which had a strong print, was dropped from the 4-month CAGR window while February and March readings were flat – likely driven from poor weather. The AI-driven fixed-investment boom is still intact.
There were no major data updates from consumption – nominal is still strong while real consumption growth looks tepid.
We continue to see risk of the Hormuz shock tilted towards inflation rather than recession, and recent data are showing early evidence of this view.
The US economy can handle higher oil and refined product prices better than most other countries given the persistently strong dollar and the availability of cheap natural gas. There is still a breaking point on how much of a commodity price surge the US can stomach, but we are far from that breaking point right now. The dollar is liable to strengthen in an environment of US growth outperformance.
We are reminded of how the tech boom kept going through the late 1990s even as the Asian Financial Crisis drove a global recession and a US manufacturing recession. We see some parallels to the current moment, where the Hormuz shock could be incredibly nasty for many advanced and emerging economies, global energy prices make new all-time highs, and yet the US economy and its tech boom skate through, breeding imbalances and papering over weaknesses in other cyclical sectors.
This cycle is ultimately being driven by the AI-boom, and we don’t see any hints of s-curve dynamics for AI-related fixed-investment appearing, nor do we see any signs of shareholder impatience with respect to the capex boom.
The greater near term risks for the AI-boom are shortage and inflation rather than an outright bust. We will have a note outlining AI-related bottleneck risks and the macro implications around them soon.
AI advancements continue to impress, it appears Anthropic has reached profitability much quicker than anticipated, and earnings and guidance were pretty strong across the board for firms at the forefront of the AI boom and even firms adjacent to it.
We are expecting real GDP growth to be 2% for 2026Q2.
March weakness tied to higher commodity prices was significant, but the effects on quarterly real GDP data are primed to be backloaded into Q2 relative to Q1. There may be noticeable effects on structures and equipment investment if material costs persistently spike and raise corresponding deflators.
Labor
Baseline Views:
The labor market looks like it has stabilized and is even showing signs of a pick-up, we don’t see near-term downside risk.
The unemployment rate remains stable in the 4.3-4.4% range, prime-age employment rates are stable near or above pre-pandemic highs, cyclical employment has been growing recently, and nonfarm payrolls have been at or above breakeven estimates.
We don't know if it's stabilization or reacceleration but the risks are shifting more in the latter. We have had solid job growth in 1H2026 and are starting to see nascent signs of a pick-up
Key changes from the last update:
The May jobs report was strong. Our full-takeaways can be found here.
Consumption
Baseline Views:
We see downside risk to real consumption growth, even as nominal looks fine. People are still spending money, they’re just not necessarily consuming more goods and services.
(1) Inflation has been running hot for six months; (2) the Hormuz shock is adding more pressure to disposable income through higher energy and food prices; (3) healthcare costs are rising and crowding out wage growth, resulting in less disposable income.
With that being said, we don’t see consumption growth falling off a cliff – employment levels are healthy, wage growth for job switchers is picking up, and a deal to reopen the Strait of Hormuz could be materialized soon. Elevated tax returns also help cushion the blow from the Hormuz shock – even if temporary and the impact overstated by consensus.
Key changes from the last update:
No updates
Services
Baseline Views:
Services signal a cyclical upturn, we anticipate nominal spending to hold up, real spending will have some downside risk from the Strait of Hormuz closures squeezing discretionary incomes.
Key changes from the last update:
Hard data has caught up to the upturn in the soft data – services employment is driving the index up.
Manufacturing
Baseline Views:
The inventory restocking cycle is well underway and is showing up across the board — nominal, real, and soft-survey data all confirm it. Our base case remains that this is a temporary, two- to three-quarter phenomenon rather than a true manufacturing renaissance. Boeing aircraft production is also picking up.
Firms front-ran tariffs, building up inventory ahead of them; those inventories have since been drawn down, catalyzing a restocking cycle even as conditions held up despite the Hormuz shock. We'd revisit this call if the data warrants it.
Key changes from the last update:
Composite Mfg Activity Index held flat from the previous update, no indicators passed our mover threshold, but we did get ISM and employment data.
New orders climbed to 56.8 for the ISM Manufacturing PMI from 54.8. Employment was still sub-50.
Residential
Baseline Views:
The housing sector appears to be stabilizing in the near term despite elevated mortgage rates — even after 175bps of rate cuts since 2024.
Nominal home prices have stayed flat while real price declines and homebuilder incentives have helped clear some inventory.
Residential construction employment and residential specialty trade employment have been contracting, housing starts and permits look tepid, and mortgage rates remain elevated.
We see downside risk to housing re-emerging over the next twelve months.
Key changes from the last update:
Modest improvement in the index driven by residential construction spending, while residential building employment drove the index down.
Non-Residential
Baseline Views:
Our call from January 2025 was that the AI-boom would be the fulcrum of the business cycle, we are seeing that play out in financial markets and the real economy.
Fixed investment from the AI-boom is strong, while the rest of fixed investment data look tepid or recessionary.
Key changes from the last update:
The composite Non-Residential Index slightly decreased from the previous update, driven by a deceleration in the nonresi construction employment series.
The levels are still positive, the deceleration is likely stemming from baked effects. January, which had a strong print, was dropped from the 4-month CAGR window while February and March readings were flat – likely driven from poor weather. The AI-driven fixed-investment boom is still intact.
