Growth data challenges stagflation fears

Dave Harrison Smith, CFA
Chief Investment Officer
June 17, 2026

This week will be a busy one for investors, with geopolitics and Kevin Warsh’s first Federal Reserve meeting likely to dominate headlines. Against that backdrop, it is worthwhile to take a step back and focus on the underlying trends in the U.S. economy.

A key question over the last three months has been whether elevated energy prices would derail global economic growth. Searches for the term “stagflation,” a combination of slowing growth and rising inflation, spiked in mid-March and remained elevated through last month. Inflation has clearly accelerated, with headline inflation in the U.S. jumping to 4.2% in May. Yet, in the U.S., the growth side of the equation has been more resilient than some feared.

Survey data from the Institute for Supply Management, or ISM, provides a useful lens into this dynamic. Its Manufacturing and Services surveys are timely measures of current business activity and are closely watched by economists and investors alike. Encouragingly, both series have improved markedly over the last several months, with ISM Manufacturing improving to 54.0 and ISM Services to 54.5.

After spending much of 2025 at or below the dividing line of 50, which marks expansion versus contraction, both surveys are now clearly accelerating to the upside.

Manufacturing and Services activity have rebounded

Underlying details are also constructive. The spread between New Orders and Inventories, both sub-indicators in the ISM Manufacturing report, has markedly improved. This is a useful indicator of business cycle momentum. When new orders outpace inventory, it can signal the need for companies to increase production, restock inventories, or even invest to meet rising demand. The recent acceleration is not typical of a stagnating economy and may suggest that demand is outstripping aggregate business expectations.

New orders are outpacing inventories

We attribute the cyclical health to several forces. First, the fog of uncertainty that struck businesses following tariff announcements in 2025 appears to finally be fading. Tit-for-tat tariff negotiations created meaningful pricing volatility and made business planning more difficult. We now appear to be on more solid footing. The recent Supreme Court ruling against the use of IEEPA to impose tariffs has also created a one-time cash-flow benefit for businesses in the form of tariff rebates. As of writing, $24 billion in certified refunds had been sent to the Treasury for disbursement back to businesses, with nearly $70 billion more potentially to follow.

We also continue to see strong demand from the U.S. consumer, despite elevated gas prices. Larger tax refunds in April also supported consumer health, and the aggregate data continues to tell a story of resilience. Finally, business investment remains an important growth pillar. This has been driven significantly by the artificial intelligence boom, which has led to massive spending on data centers and related infrastructure. But the strength has not been limited to the technology sector alone.

The broad takeaway is that the U.S. economy is showing solid momentum. Risks from high energy prices, geopolitics, and faster inflation deserve investor attention. Yet, significant fiscal stimulus, supportive tax reform for both consumers and business capital investment, and a less volatile trade environment are driving resilient growth. For investors worried that the current economic expansion is running out of steam, the latest data offers an encouraging message. Growth remains intact, demand looks strong, and the economy continues to absorb shocks better than expected.

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