Equity Gains and Surging Energy Costs Divide U.S. Consumers

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

U.S. equities moved higher again this week, supported by continued strong earnings, fresh evidence of a stabilizing labor market, and growing optimism surrounding artificial intelligence (AI). Economic data has also shown signs that the stimulative tax provisions of the One Big Beautiful Bill Act coupled with massive AI data center buildouts are providing strong tailwinds to business investment, most notably in the form of the stronger March Factory Orders report. March orders showed a significant 1.5 percent jump to $630.4 billion, according to the U.S. Census Bureau, the largest monthly increase since November.

Beneath the surface, however, the story is more complicated. The economy is still advancing, yet it is doing so with a growing bifurcation between households and sectors, while inflation pressures continue to simmer in the background.

This delicate balance was illustrated by Friday’s employment report from the Bureau of Labor Statistics (BLS) showing that the U.S. economy added 115,000 nonfarm payroll jobs in April following March’s 185,000 gain. Private payrolls were a bit firmer at 123,000, and the prior month was revised slightly higher to 190,000.

Importantly, hiring appears to be broadening beyond the healthcare and social assistance sectors, which had provided all the job gains since the beginning of 2025. While health care and social assistance provided approximately 53,900 of the 123,000 private payrolls, other segments, including trade, transportation, and utilities, also propelled strong job gains, adding a collective 60,000 new positions. The one-month diffusion index, a measure from the BLS that tells us how many different industries are adding jobs rather than just how many total jobs were added, registered its fourth consecutive reading above 50 in April at 53.8. After spending much of its time below 50 in 2025, a pattern that has historically tended to align with economic soft patches rather than periods of strength, its recent streak comes as evidence that hiring is finally broadening across more industries.

The BLS’s household survey, meanwhile—a separate measure of the labor market used to calculate the unemployment rate—painted a softer picture for the third straight month, with overall employment falling by 226,000. Despite this, the unemployment rate held steady at 4.3 percent because the labor force (those employed or looking for a job) also shrank for the third month in a row. A total of 92,000 people exited the labor market in April, thereby lowering the denominator. On an unrounded basis, the unemployment rate edged up from 4.25 percent to 4.33 percent, and labor force participation slipped to 61.8 percent—down from 62.5 percent a year ago and below the post-COVID high of 62.8 percent seen last August. This poses a potential constraint to future economic growth because it reveals that the labor market is tightening for the wrong reasons: a shrinking supply of workers rather than a surge in demand.

Wage growth also moderated, with average hourly earnings rising a slight 0.2 percent month over month, which pushed the year-over-year gain to 3.6 percent. With headline Personal Consumption Expenditures (PCE) inflation residing at 3.5 percent YoY, overall consumer real wage gains are essentially flat—an important reason consumer sentiment continues to falter. Further echoing this sentiment, the University of Michigan’s consumer sentiment index fell to 48.2 in May, surpassing last month's record of 49.8 as the lowest since data collection began in 1978. Much of this was driven by a steep drop in how people view current economic conditions, falling nearly five percentage points, to 47.8 from 52.5, while the expectation for “real income”—pay raises adjusted for inflation—fell to 40, also its lowest level in the survey’s history.

The Michigan report highlights a theme we have repeatedly discussed in recent years—the widening split in economic experience across the wealth spectrum. The report noted that since mid-2023, high-wealth households—those most exposed to equity gains—have reported markedly better conditions than middle- and lower-income consumers, who continue to feel the pinch of higher prices.

A recent report from the New York Fed’s Liberty Street Economics blog reached a similar conclusion: Prior to 2023, little difference existed in spending among various income cohorts, the study found. However, since 2023, spending growth has been disproportionately driven by high-income households, with discretionary and luxury purchases driving consumption, while spending on necessities has softened.

Wage differences explain part of this gap but only since 2025. Since 2022, lower-income households have consistently experienced higher inflation, while the real net worth driven by large increases in financial assets held by higher-income cohorts likely explains the rest. That remains a significant risk as we look ahead.

These increasing economic pressures also show up in the “hard” data. The personal saving rate fell to 3.6 percent in March, and last week’s data showed that total consumer credit outstanding in March jumped by $24.9 billion, the largest monthly increase since 2022, suggesting more households are leaning on borrowing to sustain spending.

Earnings calls from last week echoed this message at the lower end of the income spectrum. Kraft Heinz CEO Steve Cahillane said consumers are “running out of money at the end of the month,” noting negative cash flows and drawdowns of savings among lower-income households. McDonald’s CEO Chris Kempczinski, meanwhile, pointed to “heightened anxiety,” with gas prices hitting lower-income consumers especially hard. In short, today’s consumer backdrop still looks increasingly reliant on higher-income households, where spending tends to be more closely linked to the wealth effect of equity market performance.

The good news is that business investment tied to the AI build-out continues to provide meaningful support. March Factory Orders rose 1.5 percent (from a revised 0.3 percent), and the gains were broad. Within the report, core capital goods orders (non-defense capital goods excluding aircraft)—a key proxy for business fixed investment—jumped 3.4 percent, while shipments rose 1.2 percent.

Still, some of this strength may reflect front-loading ahead of potential price increases or supply disruptions. As Chris Williamson, chief business economist at S&P Global Market Intelligence, noted regarding the April manufacturing Purchasing Managers’ Index (PMI), which rose to the highest level since May 2022, “The surge in manufacturing activity in April is not the cause for cheer that at first glance it suggests. A key driving force behind the upturn is the need for companies to get ahead of further feared price rises and supply shortages, providing a short-term boost that could fade in the coming months as headwinds to the economy continue to build.”

Overall, the preponderance of data continues to point to a U.S. economy that is moving forward but with a narrow margin for error. The labor market is stabilizing, business investment remains supportive, and markets are responding to better earnings. At the same time, inflation and affordability remain real constraints, and the widening bifurcation across households is a reminder that the economy is not experiencing this cycle evenly. In uncertain environments, the playbook doesn’t change: Stay diversified and continue to adhere to a long-term financial plan.

Wall Street wrap

Inflation concerns linger as energy costs bleed into service sector: The April Institute for Supply Management (ISM) Services report shows a sector still in expansion mode at 53.6, though it has slowed to its weakest pace since November 2025. While the headline number remains above the 50 threshold, the report paints a picture of a slowing services sector facing high input costs amid persistent inflationary risks.

The slight dip from last month’s reading of 54 was driven largely by a significant pullback in new orders, falling to 53.5 from a robust 60.6. Meanwhile, prices paid by service firms remained stubbornly high at 70.7. This matches March’s figure and ties for the highest level since October 2022. Combined with similar price spikes in the ISM Manufacturing release, the higher prices reflect a growing risk that energy-related costs resulting from the ongoing Middle East conflict are seeping into the stickier services sector.

Turning to the labor market, employment remains in contraction at 48, according to the ISM report. While this marks an improvement over last month’s 45.2, it still represents one of the weakest readings for the sector since last September.

Job gains continue to broaden despite shrinking labor force: The latest batch of employment data from the BLS reveals a stabilizing yet bifurcated labor market that, while significantly beating expectations, continues to face underlying participation issues.

Total nonfarm payrolls increased by 115,000 in April, driven by a robust private sector. Coupled with last month’s strong report, a slight acceleration in hiring emerges. The pace of private-sector payroll growth on a three- and six-month basis has risen to 55,000 and 68,000, respectively, pushing comfortably above the 12-month average of 43,000.

For much of 2025, job gains were heavily concentrated in just two industries: healthcare and social assistance. While these areas continued to dominate, accounting for a combined 53,900 jobs last month, this trend of isolated growth is waning. Of the 123,000 private-sector jobs added last month, 113,000 hailed from the services sector. Transportation and warehousing received a significant boost, largely powered by a 38,000 job increase in couriers and messengers, while retail trade logged over 22,000, and construction added more than 9,000 roles.

The diffusion index, which measures the percentage of industries that are actively hiring, checked in at 53.8 percent. While this is a slight dip from 56.8 percent last month, it marks the fourth consecutive month this index has stayed above 50 percent, a reassuring sign that job growth has begun to broaden into other industries after spending much of 2025 below that expansionary threshold.

While the payroll numbers are positive, however, a significant divergence continued to emerge between the BLS’s headline Establishment Survey and its Household Survey counterpart, which is the measure used to calculate the unemployment rate. This survey showed weakness for the third straight month, indicating 226,000 job losses.

Despite these losses, the headline unemployment rate held steady at 4.3 percent (though the unrounded rate crept up slightly from 4.25 percent to 4.33 percent) thanks to a shrinking denominator: 92,000 individuals dropped out of the labor force. Consequently, the labor force participation rate fell to 61.8 percent, down from 62.5 percent a year ago and noticeably below the post-COVID high of 62.8 percent we saw last August and signaling a potential constraint to future economic growth.

‘Low hire, low fire’ environment dominates even amid AI-fueled job cuts: U.S.-based employers announced 83,387 job cuts in April, according to the latest Challenger Job Cut Report, with AI as the lead catalyst, accounting for 21,490 (26 percent) of April’s announcements. This marks a 38 percent increase from the 60,620 cuts recorded in March and the third-highest total for the month since 2009, trailing only the 105,441 cuts we saw last year and the pandemic-driven spike of 671,129 in April 2020. For the year, AI has been cited in 49,135 cuts, making it the third-leading cause of layoffs, trailing only general market and economic conditions (53,058 cuts) and business closings. Total cuts stand at 300,749 so far this year in a significant drop from the 602,493 cuts made during the same period last year, showing that a “low fire, low hire” theme continues to prevail despite a rise in AI-fueled restructurings.

Even after adjusting last year’s data to remove the one-time impact of 281,452 government layoffs from the Trump administration’s Department of Government Efficiency, the current year-to-date total is tracking slightly lower than last year’s adjusted baseline of 321,041.

Alongside these corporate restructurings, we have also observed a potential cooling in future hiring. Hiring plans fell 69 percent in April to 10,049, down from 32,826 in March, and represent a 38 percent drop from April 2025. Year to date, employers have announced plans to hire 60,936 workers, a 13 percent decrease from the same period in 2025.

Initial jobless claims reflect stabilizing employment: Lastly on the labor front, while job cut announcements have risen, the weekly initial jobless claims continue to suggest a low level of actual layoffs. Initial claims checked in at 200,000 following last week’s revised 190,000—tied with the week of September 23, 2022, for the lowest level since 1969. Similarly, continuing claims dipped to 1.766 million from 1.776 million the prior week, further signaling labor market resilience.

Consumer sentiment readings hit new lows following energy shock: The preliminary May 2026 University of Michigan consumer sentiment data reached historic lows. The overall index fell to 48.2 from 49.8, while the “current conditions” component dropped sharply to 47.5 from 52.5—both marking the lowest readings since the survey’s inception in 1978. Consumer expectations edged up slightly to 48.5 from 48.1, though they remain near all-time lows.

Inflation expectations, meanwhile, showed modest improvement but remain elevated: The one-year outlook dipped to 4.5 percent (from 4.7 percent), and the five- to 10-year outlook eased to 3.4 percent (from 3.5 percent). Despite recent improvements in broader labor market data, consumer anxiety persists. Sixty-one percent of respondents still expect unemployment to rise over the next year, a slight improvement from 64 percent last month and the November peak of 69 percent but still high by historical standards.

Notably, the data highlighted the growing influence of the “wealth effect” from equities. The median value of respondents’ stock market investments hit a record $311,218, a massive jump from the $100,000–$150,000 range that persisted from 2010 through late 2023.

The week ahead

Monday: The April 2026 Existing Home Sales report from the National Association of Realtors is scheduled for release at 10:00am EST. We will be paying attention to the median home price, which hit a record $408,800 in March, and whether it has begun to decline amid higher inventory.

Tuesday: The BLS will release its April 2026 Consumer Price Index (CPI) report at 8:30am EST. Energy will be in the spotlight, expected to drive a second consecutive month of hot headline inflation. We are watching to see if high energy costs are seeping into elements of core CPI inflation.

Additionally, the National Federation of Independent Businesses Small Business Optimism Index for April 2026 is scheduled to be released at 6:00am EST. Pricing data will be the primary focus, as small businesses continue to be squeezed by rising input costs and weakening consumer demand. A net 25 percent of owners raised average selling prices in March—well above the historical average. We will be watching to see if businesses have continued to pass on higher costs or begun to absorb them after profit trends hit a 10-month low in March.

Wednesday: The BLS is scheduled to release its April 2026 Producer Price Index (PPI) report at 8:30am EST. We will be looking at the PPI for insights into future consumer prices as it rounds out the inflation picture just 24 hours after the CPI release. A softer PPI following a hotter CPI could signal that manufacturers are preparing to pass new costs down the supply chain.

Thursday: The April 2026 Advance Monthly Retail Sales report from the U.S. Census Bureau is scheduled for release at 8:30am EST, offering a pulse check on how geopolitical uncertainty and higher energy costs have weighed on consumer sentiment.

Friday: The U.S. Federal Reserve’s April 2026 Industrial Production report is scheduled for release at 9:15am EST. Following an unexpected 0.5 percent drop in March—the largest decline in nearly two years—we are looking to see if U.S. industrial sector has begun to recover after the ISM PMI report held steady in April.

Follow Brent Schutte on X and LinkedIn.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.

There are a number of risks with investing in the market; if you want to learn more about them and other investment-related terminology and disclosures, click here.