May 2025 — Steady Labor, Mixed Signals, and a Hint of Hope

May 2025 continues to show a labor market holding steady. Unemployment remained at 4.2% for the third month in a row, hovering near the natural rate and suggesting that the labor force is operating at a kind of equilibrium. This stability is a strong signal that the economy’s underlying fundamentals are sound.

Headline inflation, however, ticked up slightly to 2.4%, while core inflation stayed constant at 2.8%. This divergence suggests that supply-side pressures, possibly stemming from the administration’s tariffs, are beginning to appear in prices for energy, commodities, and food — components that are excluded from core inflation. While this uptick deserves monitoring, it is not yet a cause for alarm.

On the expectations and sentiment front, one-year-ahead inflation expectations fell by 0.4% to 3.2%, a welcome sign after several months of elevated readings. Meanwhile, the Consumer Confidence Index held steady at 52.2. Taken together, these two indicators suggest that households are pausing their previously negative speculation about the economy. In other words, people are beginning to recalibrate: instead of overreacting to headlines or narratives, they are starting to process the actual economic conditions.

This dynamic speaks directly to the interplay between narrative-driven perceptions and real economic performance — what some behavioral economists, like Akerlof and Shiller, describe as “animal spirits” at work. For months, expectations and confidence had deteriorated while core indicators like inflation and unemployment improved. May seems to mark a turning point, where adaptive—or rationally updating—expectations are starting to take hold.

Overall, May is a cautiously optimistic month. The labor market remains solid, inflation is manageable, and households appear to be recalibrating their outlook. There are small signs of tariffs starting to influence prices, but for now the economy looks resilient. Policymakers may want to prepare for potential supply-side pressures, but the general tone is hopeful: people are starting to see that the economy isn’t as fragile as headlines may have suggested