Solid expansion as U.S. inflation reaccelerates to 3.7%

The U.S. economy keeps signaling expansion, but with an increasingly visible crack: inflation is accelerating again. Headline CPI has climbed to 3.7% year over year and the PCE, the Federal Reserve's preferred gauge, also stands at 3.7%, both rising. Employment is holding up, credit is flowing and industrial activity and consumer spending are growing, yet consumer confidence is sunk at levels historically associated with recession. Taken together, a solid picture with a reopened inflation front.

None of the classic indicators that tend to anticipate recessions is currently active: zero out of eight. The 10-year–3-month curve keeps a positive slope of 92 bp, the Sahm rule reads just 0.07 pp (well below the 0.50 threshold), jobless claims are down 8% year over year, business credit is expanding at 8.0% and financial conditions are loose. Mortgage delinquency is rising, but modestly (+0.12 pp over a year), short of any alarm level. In historical terms, the set of leading recession signals remains switched off.

This is the weak spot. In the United States, CPI stands at 3.7% year over year, accelerating +0.4 pp over three months from a 3.3% baseline. The PCE follows at 3.7%, with a milder +0.1 pp advance over the same period. The direction is unmistakably up. The euro area offers the opposite picture: HICP eases to 2.9% year over year, slowing −0.1 pp over three months and now close to the ECB's target. The divergence between the two blocs is notable.

The U.S. labor market remains firm, though the pace of hiring has cooled: payrolls added 57,000 jobs in the month and the unemployment rate is at 4.2%, even a tenth below where it stood three months ago. The Sahm rule shows a gap of only 0.07 pp, with no signal of deterioration, and a three-month average unemployment rate of 4.3%. Weekly jobless claims, at a 202,750 four-week average, are down 8% versus a year ago. Employment confirms the strength of the cycle.

Credit is circulating normally. Business loans are growing 8.0% year over year and consumer credit 2.1%. Delinquencies present a mixed but contained picture: mortgage delinquency is up to 1.89% (+0.12 pp over a year) and business delinquency to 1.34% (+0.05 pp), while credit-card delinquency falls to 2.92% (−0.14 pp). Financial conditions, measured by the NFCI at −0.55, are loose and below their historical average, easing access to financing.

Activity is in good shape with one notable exception. Industrial production is growing 1.1% year over year and retail sales are advancing strongly, up 6.7% year over year. In housing the signal is mixed: permits fall 1.8% year over year while starts rise 3.5%, against a 30-year mortgage rate of 6.66% (−0.06 pp over a year). Manufacturing surveys, leading indicators, point to clear expansion: Empire State at +15.6 (improving +4.6 over three months) and the Philadelphia Fed at +41.4. The counterpoint is consumer confidence, at 49.5 and down 11.2 points over a year, a level typically associated with recessionary territory.

Stability on both sides of the Atlantic. The Federal Reserve is holding the federal funds rate at 3.63%, unchanged over the past month and essentially flat over three months. The ECB is keeping its deposit rate at 2.25%, also unmoved in the past month, after raising it +0.25 pp over the quarter. Monetary policy is on pause, awaiting more data.

U.S. net liquidity stands at $5,825bn, with a slight 0.3% pullback over the past four weeks but still 1.9% above the level of thirteen weeks ago. The Federal Reserve's balance sheet, at $6,738bn, is expanding (+0.6% over thirteen weeks and +1.4% year over year), indicating that the drain of quantitative tightening has given way to a more accommodative stance. The Reverse Repo facility is virtually depleted at $2.2bn, so that cushion no longer absorbs stress. The Treasury General Account (TGA) has risen to $911bn, draining $31bn over four weeks, a liquidity-reducing factor. M2 is growing 5.5% year over year to $23,155bn. Outside the United States, balance sheets are contracting: the ECB is down 2.9% year over year and the Bank of Japan 10.9%. The net balance is one of stable liquidity with a slightly contractive short-term bias, a generally benign backdrop for risk assets as long as the Fed's balance sheet keeps growing.

Defensive sectors are clearly lagging the market: they have underperformed by 14.4 pp over three months and 4.7 pp over the past month (data through May 29, so the signal arrives with a lag). The more current Dow/Nasdaq gauge shows the Dow outperforming the Nasdaq by 3.7 pp over three months and 3.0 pp over the past one. The combined reading points to a high appetite for risk, with investors favoring the more cyclical segments.

The data set describes an economy in expansion: employment is resilient, credit is flowing, activity is growing, financial conditions are loose and none of the classic leading recession indicators is switched on. Sector rotation and liquidity confirm that appetite for risk. The two caveats are clear and worth keeping in view: U.S. inflation has reaccelerated toward 3.7% in both CPI and PCE, and consumer confidence remains at very depressed levels despite the strength of real spending. This is a picture of expansion with a reopened price front, not one of imminent cooling.