CONSUMER BUYING PRICES

Our economy is primarily driven by consumer spending, which is 63% of GDP. Understanding the analytics of consumer spending is complex and ambiguous. Learning about the K-shaped economy has given me a new viewpoint. And as always, writing Market Insights gives me the opportunity to research and learn about issues that are impactful to our economy.

The phrase K-shaped economy was coined by Peter Atwater in 2020. He was looking at how different people recovered during the pandemic. He noticed that the consumer spending by the wealthiest were on a rising escalator, while middle income families were struggling to keep up and the lower income families were hurting the most.

This is how the New York Fed data defines the three groups of population and their consumer spending. The income levels are based on average household earnings for a family of three in their respective area. The consumer spending is the cumulative growth in retail spending, adjusted for inflation. The growth is for January through March (Q1, 2026).

• High-income households earn more than $125,000 annually and account for 20% of the population. Their spending-growth rose by 7.6%.
• Middle-income households, those earning less than $125,000 but more than $40,000, gained about 3%. They represent roughly 50% of households.
• Low-income households earning under $40,000 gained just over 1%. They represent about 30% of households.
• Combining these groups brings consumer spending for Q1 to 1.6% down from 1.9% in Q4 last year.

Moody’s Analytics recently estimated that the top 10 percent of households were responsible for nearly half of all spending. Pantheon Macroeconomics finds that the wealthiest households have accounted for a roughly stable 40% share of total consumer spending for 25 years.

High oil prices and inflation will hurt many people and parts of the economy. Inflation adjusted consumer spending will slow. “Americans are currently living in two different worlds,” said Mr. Atwater, who popularized the K-shaped economy. “Those at the bottom can’t help but notice the overabundance above them.”

According to the New York Fed, since 2023, the real net worth of the top 1% of earners has climbed more than 25%, fueled largely by surging financial assets. The middle 40% of households has gained less than 10%. This data makes a strong case for continued high-income spending that will keep GDP relatively strong.

The AI Magnificent 7 tech companies are having an outrageous effect on corporate profits, stock market indices, and GDP spending. Is it a sugar-high boost or a ready-to-burst bubble market?

The U.S. real GDP grew by 2.1% in 2025, slowing from 2.8% in 2024, with the government slowdown in Q4 hurting the 2025 rate. For Q1 this year, GDP is up 2% on an annual basis, even though consumer spending dropped to 1.6% from 1.9% in Q4 last year.

Manufacturing output grew 2% in 2025 after being flat or down in 2023 and 2024. Manufacturing jobs have decreased, while productivity has improved.

Business spending, primarily categorized as "Gross Private Domestic Investment" (including fixed assets like machinery and buildings), typically accounts for roughly 15% to 18% of the U.S. GDP. Business outlays in Q1 this year on equipment and structures advanced 10.4%, the fastest pace in almost three years. Information processing equipment and software both posted outsized gains.

Here’s the kicker. That business spending for Q1 is a higher percentage of GDP than consumer spending, which normally is 63% of GDP. Yikes, this has never happened before.

Morgan Stanley estimates business spending by the five largest AI data center developers to be more than $800 billion this year, and $1.1 trillion next year. At 3.3% of gross domestic product, next year’s figure would exceed projected spending on national defense. That roughly matches what all the non-technology companies in the S&P 500 spent in 2025 combined.

According to Greg Ip of the WSJ: “Since January 2025, manufacturing jobs have indeed fallen by about 100,000 workers, or roughly 0.6%. In the same period, though, manufacturing production rose 2.3%, and manufacturing shipments, unadjusted for inflation, climbed 4.2%.” It’s not only AI that is driving this growth. Space X and other similar aerospace companies, along with transportation, excluding cars and trucks, are strong. Boeing, after finally meeting safety standards, delivered 72% more planes last year. We will also start seeing more defense manufacturing as the U.S. replaces weapons used in the Iran war.

The outlook for the economy depends on the development of the war in Iran and its impact on inflation. The longer it continues, the worse it will be for the global economy. Consumer spending will be burdened by higher energy prices, rising transportation costs, and continued disruptions in supply chains.

The bottom line is we now know how the 63% of GDP consumer spending is calculated, and while it may fall, it won’t tank. The $800 billion in AI spending this year, and a strong manufacturing base are very positive signs for our economy.

For a fascinating analysis on the effects of the AI beast, I refer you to Greg Ip’s Wall Street Journal article. AI Is Distorting Practically Everything About the Economy. “It makes growth look better and the job market look worse. Maybe an AI investment bust wouldn’t hurt so much after all.” For those of you who don’t subscribe to the WSJ, ironically, I used AI to summarize it: Artificial intelligence has become a major force distorting key economic indicators, making growth appear stronger and the job market weaker than they actually are. Ip describes this as a "joyless" revolution where massive AI-related investment in data centers and software creates a "two-speed economy," separating the booming tech sector from stagnant traditional industries.

As always, we are in a VUCA world. For those new readers and people like me that quickly forget, VUCA is VUCA - VOLATILITY, UNCERTAINTAY, COMPLEXITY AND AMBIGUITY. The economy is now moving at AI speed. What happens in the future depends on the many volatile factors, which reminds me of a Larry David story. When asked whether he prefers boxers to Jockey shorts, he answered “Depends!”

INFLATION

The U.S. Iran War is taking its energy toll on inflation. Duh!

• The Consumer Price Index (CPI) for April rose 0.6% after rising  0.9% in March, and 3.8% on an annual basis after 3.3% in March. Core CPI was up 0.4% for April after  0.2% last month and up 2.8% on an annual basis after up 2.6% in April.
• Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, spiked to 0.7% for March from 0.4% in February. The annual rate was 3.5%. The core rate for March was 0.3% down from February at 0.4%. The annual core rate was 3.2%.
• The Producer Price Index for April jumped 1.4%, twice the March increase. This lifted the 12-month inflation rate to 6%, the highest reading since 2022. Even the core prices, excluding energy and food prices, soared 1.0% from last month and 5.2% from April 2025.

With inflation expanding and job growth stable, the Fed is unlikely to lower interest rates. While newly confirmed Fed Chairman Kevin Warsh may support lower rates, monetary policy decisions are made collectively by the 12-member Federal Open Market Committee and require a simple majority to change the rates.

MANUFACTURING

AI is the key driver

The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) continued its four-month manufacturing upturn as April growth matched March at 52.7 and is the fastest continuous rate since 2022. The reduction in tariffs has helped. However, the growth is still surprising considering the elevated producer prices from the Strait of Hormuz closure and the supply chain slow down. These numbers indicate a solid underlying growth in manufacturing.

The bad news is that all commodity prices surveyed rose again to 84.6 in April from 78.3 in March and the highest reading since 2022.

In major manufacturing categories, 13 out of the 18 reported expansion, while three reported contractions, and two reported no change. The major measures of activity were mixed: the index for new orders rose to 54.1 from 53.5, while the production index declined to 53.4 from 55.1. Both remain in solid expansion territory, signaling growth.

The good news is that the order backlogs continued growing again this year, despite its contraction for 39 months going back to September 2022. The April index is 51.4, now the fourth consecutive month in expansion territory.

Despite signs of improving demand, the employment index fell again and has been in contraction for 31 consecutive months.

Here is the other important manufacturing data affecting our industry.

• Core industrial production, which excludes volatile autos, rose 0.2% in March 2026, following a strong February. High tech was very strong again but was offset by drops in the energy, utilities and mining sectors.
• U.S. core capital goods new orders, excluding aircraft, continue to rise, up 0.9% in March and 7.6% in the past year, the largest annual gain since mid-2022.  All major categories, outside of transportation, rose last month, led by computers and electronic products (+3.7%), industrial machinery (+0.8%), and electrical equipment (+0.7%).  Primary metals, machinery, and computers and electronic products have each experienced double-digit growth in the past twelve months.  Particularly, orders for computers and electronic products are up 15.0% over that time frame.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose 1.2% in March up from 0.9% in February. They are now running at an 8.3% annualized rate in Q1 versus the Q4 average.
• The National Federation of Independent Business Small Business Optimism Index dropped 3.0 points in March to 95.8, falling below the 52-year average.
• Employment is strange as are a lot of things. Since the end of 2023, healthcare and social assistance have added nearly 1.8 million private-sector jobs. Outside of that, private-sector jobs have fallen by 127,800. The WSJ sums it up as “It’s a labor market unlike any other: Unemployment has drifted up, layoffs are low, hiring is slow, and the economy needs far fewer new jobs than before.”
• Construction spending for March 2026 reached a seasonally adjusted annual rate of a 0.6% increase over February and 1.6% above March 2025 levels. Private residential construction led the growth, offsetting a continued decline in nonresidential projects, which have now contracted for nine consecutive quarters.
• Car and light truck sales in April 2026 reached a seasonally adjusted annual rate (SAAR) of 15.9 million units, representing a 7.1% decline compared to April 2025 and marking the eighth consecutive month of year-over-year declines.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our nine locations and is a diverse industrial base. Based on our twelve-month trailing average, volumes for April fell 7%.

CHINA

The week of the Trump-Xi summit

We will be hearing all this week about the negotiations between the U.S. and China. The major issues for discussion will be AI, technology, rare earth metals, high-end semi-conductors, tariffs, and agricultural trade. The U.S. Iran war along with issues about Taiwan may also be discussed.

China always has a long-term strategy in place. They are master negotiators, patient and understanding of Trump’s TACO threats (Trump Always Chickens Out) and his preference for short-term deals. China knows how to give minor concessions and not follow through. The past agreements to buy large amounts of soybeans are a prime example.

AI and tech are at the top of the list for both superpowers, the U.S. and China. Jake Sullivan, the national security advisor to Biden, recently warned that China is striving for dominance in critical areas from EV batteries to biotechnology. Also, Beijing uses the tight relationship between state and private sectors to rapidly diffuse innovations through the economy and ensure that the People’s Liberation Army benefits from each advance.

“In sector after sector,” Sullivan writes, “China has built or is building dominant positions in many of the foundational layers that underpin the modern economy.” He also points out that the technological primacy that underpins U.S. global power is under assault.

The war in the Persian Gulf is driving more alumina to China, swelling the country’s surplus and keeping smelting margins elevated, with Chinese aluminum output surging as a result. Chinese imports of the main raw material for aluminum jumped to a two-year high in March, as cargoes bound for smelters in the Middle East were rerouted to China. Chinese alumina imports rose to 338,000 tons last month, an 87% increase on February and nearly 30 times higher than the previous year, according to the latest data from customs.

In response to trying to beat the price increases and supply chain issues from the U.S. Iran war, China’s exports rose 14.1% from a year earlier in April. This was up from a 2.5% increase in March, according to data recently released by the General Administration of Customs.

In April 2026, China's official manufacturing PMI remained in expansionary territory at 50.3, dipping slightly from 50.4 in March. Rating Dog/Caixin General Manufacturing PMI rose to 52.2 from 50.8 in March, indicating the fastest expansion since December 2020. China’s export growth accelerated in April after a brief slowdown in March, reinforcing trade’s role as a key stabilizer of the economy.

METALS

Are high aluminum prices creating demand destruction?

Aluminum prices, using PMTA, are up 87% on a year-to-year basis. That price includes the Midwest premium tripling in a year from $.38 to $1.14. How is this affecting manufacturers?

Out of curiosity, I compared aluminum usage from Shapiro’s same diversified manufacturing accounts for the first four months of this year versus last year. Aerospace remains strong. The auto industry, trailer makers, and HVAC are spotty. The RV industry is up slightly. Overall, these aluminum-based manufacturers' volumes are down 10%. The reasons sighted are mainly uncertainty in the economy and higher prices.

The auto industry is a prime example. It estimates the higher price of aluminum could cost the industry $5 billion later this year and into next. Gerrit Reepmeyer, Partner of Consultancy at AlixPartners, estimated that the rise in aluminum prices could add between $500 and $1,500 to the cost of a vehicle assuming the increases persist and no hedges were applied.

Consumers are already stretched given the fact that average car prices are now $50,000, up from $38,000 prior to the pandemic. According to Albert Waas, Managing Director and Senior Partner at BCG, “But obviously at some point you will be just forced to increase prices. And as long as everybody is doing it, you basically keep your market share.”

He’s right, you may keep your market share, but the market may decrease with higher prices.

The current Midwest premium of roughly $1.14 keeps rising with the LME and the 50% Section 232 tariff on aluminum. A few weeks ago, Trump tweeted that Canada and Mexico could see some relief from the 50% tariffs if they or their respective companies pledged to invest more in the United States. Since the United States-Mexico-Canada Agreement (USMCA) 5-year trade deal ends June 30, this might have been a prelude to negotiations. On the other hand, it might have just been another late-night tweet.

The question of how high LME prices will rise is uncertain. The U.S. Iran war caused aluminum to spike 10%. The lost production from the Gulf state producers is substantial and will last over a year. The longer the war goes on, the worse it will be.

Harbor Intelligence is still forecasting the LME to climb to $4000 this year. That along with the Midwest premium could bring the price to over $3.00. I will be attending the June Harbor Intelligence meeting Chicago and look forward to reporting on that in the June Market Insights.

Thanks to Edward Meyer of Marex, I am presenting the Reuters latest forecast for aluminum and copper. This is more conservative than Harbor.

Scrap prices for May have rallied the most since the beginning of the year. This is mainly due to the decreased availability of prime. Prime segregated scrap prices are up $0.10 to almost $0.15 per pound. Secondary prices are also up about 10%. Copper prices are up 6% while stainless prices were up a few cents. Scrap steel prices are flat.

CLOSING

We have always lived in a world of change. Fast changes used to be referred to as warp speed. All this information is now coming at us at AI speed. We have seen many benefits for our health, education, and scientific breakthroughs, and more are coming. However, AI will also be distorting our lives. There is a considerable amount of AI information that is simply untrue, and the blind trust placed in AI-generated answers and content will have profound implications for our lives and society.

As Sam Altman said, “AI will probably most likely lead to the end of the world, but in the meantime, there'll be great companies.” I hope this was said as a joke. In the meantime, take a look at the quotes below and let me know your thoughts.

Also in closing, I want to thank my editor of Market Insights, Judy Ferraro, who is retiring this month. I love doing the research for these. Writing them is another story. Judy has been able to take my research and disjointed thought process in my drafts and transform them into something that is coherent. Without her help, you would not be able to understand what I am saying.

My older brother Max has been my best friend and closest supporter in my life. He knows exactly how I think. He is always positive. When I first started writing Market Insights he said, “these are great, who writes them for you?”

I will miss having Judy as an editor and the one who brings fun and humor into Market Insights. Judy, thank you so much.

“AI won't replace humans. But humans who use AI will replace those who don't” - Sam Altman

“The development of full artificial intelligence could spell the end of the human race.” - Stephen Hawking

“Pretty scary.” - Bruce Shapiro