Report on economic growth and inflation shows signs of stagflation
San José, CA – On Thursday, May 28, the Bureau of Economic Analysis (BEA) of the U.S. Commerce Department released two major reports on the economy. The first was a revised report on Gross Domestic Product, or GDP. While the first (or so-called “advanced”) estimate of GDP for the first three months of the year, January through March, released at the end of April said that the economy grew at a 2% annual rate, the second estimate said that growth was only at a 1.6% annual rate, slower than the 2.1% rate of growth in 2025.
That same day, the BEA also released a report on Personal Income and Outlays for April 2026. After-tax income, when adjusted for inflation, fell by 0.5%, the second month that income fell this year. While spending, also adjusted for inflation, rose by 0.1%, the fall in income meant the savings rate fell to only 2.6%, the lowest in four years.
The flip side of a lower average savings rate is the more people are borrowing more to make ends meet. According to the Federal Reserve Bank of New York, more than 13% of credit card borrowers are 90 days or more behind on their payments, the highest rate in 15 years, when the economy was still struggling to recover from the 2008 Great Financial Crisis.
More than 10% of student loans are also 90 days or more late on payments. Student loans make up the greatest amount of consumer borrowing – more than credit cards or auto loans. Auto loans were not immune, with more than 5% of auto loan borrowers 90 days or more behind on payments, the highest in more than 20 years.
Not surprisingly, late borrowers were most likely among low-income households, followed by middle-income, and high-income households having the lowest rate, at less than half that of low-income borrowers. People are being squeezed by higher interest rates, higher balances (more than 20% of credit card users have balances of over $10,000), and paychecks shrinking from inflation.
Personal income and spending were both squeezed by higher inflation. The Personal Consumption Expenditures or PCE inflation rate rose to 3.8% from a year ago. This is the highest rate of inflation by this measure in three years. The PCE is the inflation rate watched by the Federal Reserve. With this inflation rate higher than the Fed’s 2% target for five years in row and now rising with higher gasoline prices because of Trump’s war on Iran, the Fed’s next interest rate change might be to raise interest rates, seeking to slow the economy and lessen pressure for higher prices.
Workers are also being squeezed by the fact that a larger share of the economy is going to corporate profits, which mainly benefits the top 1% of households who own half of all corporate stocks. The profit share rose to 12.1%, the highest since 1950. At the same time, the labor share, paid to workers, sank to just 51% of income, the lowest since records started in 1947. This growing divide between labor and capital can explain why more and more people are struggling to make ends meet and taking on more and more debt, while the stock market, which is ultimately based on corporate profits, is hitting new record highs.
A big chunk of the increase in the share of income going to capital in the form of profits is because of tax changes, including the 2017 tax bill and the 2025 “big beautiful bill” that cut taxes for higher income households and businesses. Labor unions are also struggling, with barely 10% of all workers in union jobs, down from more than 30% in 1950. Cuts to social programs, such as food stamps and Medicaid are also putting downward pressure on wages.
Typically, a slowing economy would raise the unemployment rate. The oil price increase in 1973 contributed to a recession and higher unemployment, while at the same time inflation rose. Today, oil prices, gasoline, diesel and jet fuel made from oil, as well as helium and fertilizer that are by products or made from oil, are all on the rise. However despite the slowing economy and job growth, so far the unemployment rate has just crept up from 4.0% when Trump took office in 2025, to 4.4% in April 2026, the last month reported on. At the same time, more people have “dropped out” of the labor force, that is, they have given up on working or looking for work. The Labor Force Participation Rate has been going down from 62.5% in February 2025, the first full month of the Trump administration, to 61.8% in April 2026. If these folks had continued to look for work, the official unemployment rate would have been 5.3% in April, a much bigger jump from the beginning of the Trump administration.