Retail sales strong again in May, but new housing activity remains hamstrung

Note: This week’s edition shifted to Thursday due to the Juneteenth federal holiday and will return to its typical Friday cadence next week. Similarly, the Week 27 edition will be published on July 2nd in observance of the Independence Day holiday. Lastly, as always, we published a separate note yesterday regarding the Federal Reserve’s June meeting.

Trend watch

Weekly U.S. air passenger counts continued to climb, reaching 19.1 million in the past 7-day period. That’s the highest pace this year and are generally associated with midsummer type volumes. Frankly, if this strength continues, it’ll easily blow through our expectations that passenger loads will peak just north of 20 million this summer. 

Our take

The latest batch of economic data continues to paint a mixed but generally resilient picture, which we’ve been saying feels like “one foot on the gas, one on the brake.”

Energy, of course, has been huge factor in 2026. It has been a headwind thus far but should eventually shift to be a tailwind later this year. U.S. gasoline prices appear to have peaked in late May, which could help ease pressure on household budgets in coming months.

At the same time, activity is showing signs of stabilization, with industrial production advancing for a second consecutive month—an encouraging signal that the goods-producing side of the economy may be finding firmer footing after earlier softness. Here, too, energy was a factor as natural gas and crude oil extraction activity increased.

Meanwhile, consumer activity remains a key area of strength, though the underlying details indicate a more nuanced backdrop. Retail sales surged to new all-time highs in May, supported in part by elevated gasoline spending and a rebound in auto sales. Importantly, the gains were not isolated, as most major retail categories posted solid improvements, indicating that consumption remains broadly intact. However, some pockets of discretionary spending appear more fragile, with Broadway attendance suggesting that even higher-end consumers may be showing signs of restraint, perhaps due to higher gasoline prices.

Trade-related activity continues to lag, reflecting ongoing softness in global demand. Key West Coast port volumes remained light again in May, though there was a modest uptick on a year-to-date basis for 2026. This dynamic points to a still-cautious trade environment, where improvements are incremental rather than robust. The muted flow through ports also aligns with broader signs of cooling goods demand, despite recent stabilization in domestic production.

Housing remains one of the clearest weak spots in the economy. New housing activity has weakened further, underscoring the continued impact of affordability challenges and elevated financing costs. While rents have perked up slightly, they remain below their pre-COVID trend, suggesting that shelter inflation may continue to normalize at a glacially slow pace, as overall housing demand remains subdued.

With the Federal Reserve (Fed) striking a more hawkish tone yesterday and appearing to align with investor expectations for a rate hike this year, interest rates will likely remain elevated. As an aside, we still believe that the bar for a rate hike in 2026 remains high based on current conditions. Regardless, mortgage rates probably aren’t heading demonstrably lower anytime soon – at least not enough to help housing get out of the proverbial ditch.

Taken together, the economy appears to be navigating a period of uneven momentum. Consumer spending and industrial production are providing support, while housing and global trade weigh on overall growth. Meanwhile, easing gasoline prices could offer some relief to households, but emerging signs of caution in discretionary spending highlight the potential for more measured consumption ahead.

Bottom line

The U.S. economy appears to be demonstrating resilience despite geopolitical uncertainty. Broader data suggest moderating inflation alongside steady growth, with the recent drop in energy prices offering some near-term relief to consumers and supporting purchasing power. Based on current conditions, we believe the bar remains high for a 2026 Fed rate hike.