S&P 500 hits new high but cracks appear in US economy

US consumer spending drops while inflation remains largely unchanged, new data shows

A screen at the New York Stock Exchange shows a news report on the S&P 500's record high on Friday. Reuters

The S&P 500 closed at a record high on Friday, completing a stunning turnaround driven by rising hopes of a trade deal with China, but as fresh cracks appear in the US economy.

Stocks declined slightly after President Donald Trump said he was cancelling trade talks with Canada, but all three major Wall Street indexes finished in the green.

The S&P 500 rose closed 0.52 per cent higher 6,173.07 after rising as high as 6,187.68 during intra-day trading. The Nasdaq Composite also closed at a high of 20,273.46 while the Dow Jones Industrial Average rose 1 per cent, or 432.43 points.

Powering Friday's gains was optimism about a US-China trade deal, with Commerce Secretary Howard Lutnick telling Bloomberg that such an agreement had been finalised. He also previewed 10 other trade deals with partners that were expected to be reached soon.

In addition, Treasury Secretary Scott Bessent said the administration could complete trade deals with 18 major partners by September 1.

The index's new high caps a remarkable comeback after global markets plunged following President Donald Trump's announcement of his universal and “reciprocal” tariff policy in April. The benchmark has risen more than 23 per cent since April 8.

Much of the market turmoil was spurred on by fears that the tariffs would lead to a global economic slowdown.

Trump announces tariffs on the rest of the world

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While the US economy has held up since Mr Trump's announcement, cracks are beginning to appear.

A Commerce Department report on Friday showed consumer spending fell 0.4 per cent in May, largely brought on by a drop-off in car sales.

“Even so, there is a clear weakening in discretionary services spending, notably in travel and hospitality, reflecting the drop in overseas visitors as well as the chilling effect of the plunge in consumer sentiment,” Michael Pearce, deputy chief US economist at Oxford Economics, wrote in a note.

Revised gross domestic product estimates released on Thursday showed the economy contracted 0.5 per cent in the last quarter.

Commerce Secretary Howard Lutnick has suggested that a US trade deal with China is on the horizon. AP Photo

The broad-based drop in consumer spending broke the idea of an “unshakable consumer”, as recent data shows a plunge in confidence amid Mr Trump's shifting trade policies.

“Some of that message was already revealed in yesterday’s GDP revisions which showed consumer spending is now estimated to have increased at a limping-along pace of just 0.5 per cent,” Wells Fargo economists Tim Quinlan and Shannon Green wrote.

The University of Michigan's Survey of Consumers showed sentiment surged from May, with consumers' fears of tariffs somewhat softening.

“Consumer views are still broadly consistent with an economic slowdown and an increase in inflation to come,” it said.

The dip in consumer spending also comes as divisions grow within the Federal Reserve on the near-term path for rate cuts.

Fed officials are debating whether tariff-related inflation will be a one-time bump or have a more persistent effect.

Some data indicates that consumer confidence is on the up. Bloomberg

Separate data from the Commerce Department on Friday showed the inflation picture changed little last month.

The Personal Consumption Expenditures Price Index rose 0.1 per cent on a monthly basis and 2.3 per cent year-on-year. Core PCE, which excludes food and energy, rose 0.2 per cent monthly and 2.7 per cent year-on-year, slightly higher than expected.

Economists mostly expect inflation to pick up in the coming months as businesses pass on higher prices to consumers.

“PCE inflation remained benign in May, but we are only just starting to see the impact of tariffs in consumer goods prices, and several favourable one-offs depressing inflation over the past few months will go into reverse from June onwards,” Mr Pearce said.

US central bank officials currently project to cut rates twice this year, according to their most recent economic projections.

Fed governor Christopher Waller, who supported the idea of a July rate cut in an interview with CNBC last week, has maintained his belief the central bank can look through tariff-related inflation. He was joined by Fed Vice chairwoman Michelle Bowman, whose support of a July rate cut was a surprising turn for the typically hawkish official.

However, Fed chairman Jerome Powell poured cold water on the possibility of a July rate cut during congressional testimony this week.

“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he said.

Mr Powell later said that most economic forecasters “expect a fairly substantial wave of price increases to come through to the consumer”, reflecting a similar argument he made after the Fed held rates steady last week.

New York Fed president John Williams also supported taking a cautious posture, saying in a speech that the current 4.25 to 4.50 per cent target range for rates remains “entirely appropriate”.

“In terms of public communications, it seems that there’s Waller and Bowman, and then there’s everyone else,” Kevin Burgett, senior analyst at LHMeyer, wrote on Thursday.

Expectations of a July rate cut have grown slightly this week, although a large majority of traders still anticipate the Fed will hold rates steady for a fifth straight meeting next month, according to CME Group data.