By Gary C. Sanger, Ph.D., CFA

 

Happy 250th Birthday, America! The U.S. and Iran signed a 60-day Memorandum of Understanding in June, creating a temporary pause in hostilities following several months of conflict. That all recently ended as a result of Iran’s continuing attacks on ships in the Strait of Hormuz. President Trump has reciprocated with new attacks on Iran, so the future is quite uncertain.

According to the Bureau of Economic Analysis, US real annualized GDP expanded by 2.1% in the first quarter, rebounding from a weak 0.5% in Q4 2025. The weakness in Q4 2025 was due mostly to the government shutdown, and the rebound was due to increases in investment, exports, government spending, and consumer spending. Projections for full-year GDP growth range from 2.2% to 2.6%. The Conference Board’s Leading Economic Index rose by 0.1% in May to 99.3 following an increase of 0.2% in April. The Index has fallen 0.3% over the past six months. Declines in the LEI signal slower GDP growth, but not necessarily recession. Details in key areas follow below.

Consumers – Conditions in the consumer sector have been stable in the second quarter. The Bureau of Labor Statistics reported that the unemployment rate dropped to 4.2% in June, down from a four-year high of 4.6% in November. New job creation has been uneven with 57,000 new jobs created in June following a gain of 172,000 jobs in May. Also, initial jobless claims remain relatively low at 215,000 for the week of June 27. The Bureau of Economic Analysis reported that personal spending and personal income each increased by 0.7% in May. The Conference Board’s Consumer Confidence index increased to 91.2 in June, up from 90.6 in May. US hourly wages for June are up 3.5% year-over-year. The two concerning new statistics, the percentage of auto loan debt and credit card debt in Q1 (reported by the New York Fed) that are 90+ days delinquent, are 5.6% and 13.1%, respectively. The auto loan number is a new record high, and the credit card number is a 15-year high.

Businesses – Conditions in the business sector have improved in Q2, and services are slightly stronger than manufacturing. The Bureau of Labor Statistics reported that Q1 2026 labor productivity increased by 0.1% and is up 2.8% year-over-year. The Federal Reserve reported that industrial production increased by 0.1% in May and is 1.7% above its year-earlier level. The US Institute for Supply Management manufacturing index decreased to 53.3% in June from 54.0% in May but has been in expansion for 20 straight months. The ISM services index was 54.0% in June, down slightly from 54.5% in May, for 24 straight months of expansion. The neutral number between expansion and contraction is 50% for both ISM indexes.

Government – On the fiscal side the US federal budget deficit for 2026 is predicted to be approximately $2.0 trillion, and the national debt stands at $31.3 trillion. Neither is good for the long-term. Costs for Medicare, Social Security and growing interest on national debt are the main drivers of the deficit. On the monetary side the Federal Reserve left rates unchanged at its June FOMC meeting. PCE inflation for May was 4.1% year-over-year, significantly above the Fed’s target of 2.0%. If inflation remains elevated, we can expect at least one rate hike in 2026.

International – The June OECD Economic Outlook states, “The conflict in the Middle East has become the dominant force shaping the global economic outlook.” However, the report was released before the current peace negotiations began. The current projections for global real economic growth are 2.8% for 2026 and 3.1% for 2027. The report’s projections assume that economic disruption from the war will be limited. Growth projections under a “prolonged disruption” scenario are much lower.

Markets – The US equity market was up significantly in Q2 despite the war in Iran. The broad market, measured by the S&P 1500, was up 15.28%. Large-cap stocks (S&P 500) were up 15.20%, mid-cap stocks (S&P 400) were up 14.47% and small-cap stocks (S&P 600) were up 19.70%. The broad market index is dominated by large-cap stocks. Global equity markets were also positive, with the S&P World Index up 12.05%. For fixed income, the S&P US Aggregate Bond Index was up slightly at 0.80%. All numbers are total returns including reinvested dividends or interest.

Closing – Until today (7/8/26), talks with Iran were on hold for the funeral of their late Supreme Leader Ali Khamenei. The optimistic outcome was that there would be a final agreement within the 60-day scheduled talks. However, this is now extremely unlikely. We are now facing the pessimistic outcome of a longer conflict that will lead to material supply chain disruptions, lower output, and higher inflation. Most analysts believe the Iranians will not negotiate in good faith. Only time will tell.