U.S. consumer spending growth slows as inflation picks up; Midwest economy mostly stable with positive signs in manufacturing

Inflation adjusted consumer spending had its second lowest quarterly growth rate in the last three years, but the strength of spending on AI infrastructure kept overall real GDP growth positive at a 1.6% seasonally adjusted annual rate. Both exports and imports continued to recover from the tariff disruptions of mid-2025. Conflict in the Middle East caused oil prices to rise during the quarter and pushed inflation well above the Federal Reserve's target of 2%. Consequently, many market participants believe a rate increase is more likely than a rate cut over the next year. This could put more pressure on both consumer and investment spending.

In the Quad Cities, the labor market remained stable with total nonfarm payroll employment still below last year's levels although construction jobs are at the highest level in decades. On a seasonally adjusted basis, the metro area gained about 900 jobs since December. Our Business Outlook Survey showed that respondents were slightly less optimistic overall about U.S. economic activity for the rest of the year compared to respondents to last quarter's survey. However, manufacturers were more optimistic than non-manufacturers. Survey respondents report seeing increased inflation pressure but differ on their expectations for inflation over the remainder of the year. Manufacturers report that price increases for raw materials and supplies are the greatest inflation concern while non-manufacturers report gasoline and diesel prices being the greatest inflation concern.

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