It was a great week for the economy

• New retail sales numbers, inflation, and a pause in rate hikes point to a strong week in the economy.
• This data shows the economy may be on its way to balancing lowering inflation with maintaining growth.

This was a busy week for economic data, and it looks like the US may be on the right track.

Americans are feeling good about the state of the economy heading into the summer as gas prices fall and inflation slows in other categories. As a result, plenty of Americans are still shopping, which means businesses can continue to hire. That's reflected in low unemployment and strong job growth at a time when hourly wages finally caught up to inflation. This also reflects rises in manufacturing, especially in motor vehicles, as the nation continues building factories at a very fast rate.

All of this good news contributes to an economy that gave the Federal Reserve the confidence to skip its string of interest rate hikes this month.

Let's take a closer look at the more encouraging numbers that came out in just the last week.

Americans are still shopping

Retail sales rose 0.3% from April to May, following a 0.4% jump from March to April, according to the Commerce Department. Consumers spent more across the board, including at the grocery store and car dealerships, with the exception of gasoline, indicative of falling gas prices.

Overall retail spending for the last 12 months increased 1.6%, rising slower than price increases. The retail spending rise was closely comparable with inflation when taking out gasoline prices. According to the AAA on Friday, a gallon of regular gas averaged around $3.59, an elevated number compared with previous years but a major drop from a year ago when prices averaged around $5.

As Americans prepare for summer travel, gasoline prices fell 5.6% in May – and have fallen 19.7% over the last year – while fuel oil prices dropped 7.7%, according to the May CPI report.

CPI increased 4% from May 2022 to May 2023, the Labor Department said on Tuesday, the lowest year-over-year inflation rate since March 2021. This came in well under the year-over-year percent increase of 4.9% in April. CPI rose 0.1% month over month, per seasonally adjusted data, less than the 0.4% month-over-month growth in April.

Core CPI, which excludes food and energy, increased 5.3% in May from a year earlier, which suggests consumers are still feeling the weight of somewhat easing price pressures. This included a 4.4% jump in used vehicle prices and a 0.6% increase in shelter prices, up from 0.4% for April 2023.

Grocery inflation is also slowing, according to the Council of Economic Advisers. In May, grocery inflation on a three-month annualized basis fell 1.7%, a stark difference from the 15.7% rise in July 2022. This was driven in part by rapidly falling egg prices, which decreased 13.8% between April and May, as well as declines in produce prices.

Inflation is slowing, while jobs and wages stay strong

In a separate release Tuesday, the Bureau of Labor Statistics reported a 0.3% increase in average hourly earnings, adjusted for inflation, for May. Real earnings rose 0.2% annually after being negative for much of the inflation surge.

US inflation also cooled below expectations on the wholesale level, according to Producer Price Index (PPI) data released Wednesday.

These numbers were supplemented this week by data revealing the jobs market remains quite strong. The Labor Department on Thursday said new applications for unemployment benefits were steady last week, suggesting that layoffs remain low. Through May, employers have added around 1.6 million jobs in 2023.

The rise in consumer spending and higher wages, which accounts for around two-thirds of economic output, suggests demand has remained steady even amid rising prices and interest rates that have stayed the same after Wednesday's Fed decision.

Interest rates skip hike as economy continues growing

The Federal Open Market Committee (FOMC) held interest rates steady at its Wednesday meeting, putting a pause on the Fed's 10 consecutive increases in 15 months. This left the target benchmark borrowing rate between 5% and 5.25%.

"We have been seeing the effects of our policy tightening and demand in the most interest-rate-sensitive sectors of the economy, especially housing and investment," said Fed Chair Jerome Powell. "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."

The Fed also projected another two 25-basis-point rate hikes before the end of the year, which would bring the benchmark rate to between 5.5% and 5.75%. The Fed's Summary of Economic Projections, which includes policymakers' expectations for future interest rates, sees interest rates coming down to 4.6% in 2024, with core inflation peaking at 3.9% by the end of the year.

The Fed expects economic growth of 1% this year, as well as the unemployment rate rising to 4.1% this year. Those growth and unemployment projections are notably more optimistic than the Fed's last estimates in March, suggesting that the central bank expects economic strength to continue through the rest of the year.

It all means Americans feel confident the economy is headed in the right direction

Americans are feeling better about the economy as well. Echoing rising retail and consumer spending numbers, the University of Michigan's preliminary data on its consumer sentiment index found US consumer sentiment rose in June to its highest level in four months. The survey data, released Friday, came in at 63.9 for the first two weeks of June, above the 59.2 mark in May and much higher than the 50.0 level in June 2022.

Short-term inflation expectations dropped to its lowest point since March 2021, according to the survey, as Americans expect prices to grow at a 3.3% annual rate over the next year. This is down from expectations of 4.2% in May.

According to a Thursday Fed report, industrial production fell 0.2% in May after two consecutive monthly increases, while the index for manufacturing rose 0.1%. After a jump of nearly 10% in April, the index for motor vehicles inched higher in May to 0.2%.

Despite sharp falls last month, manufacturing activity in New York state rose this month, according to the Federal Reserve Bank of New York. The Thursday data revealed manufacturing improved more than expected in June, driven by a large increase in shipments and a slight rise in new orders. Price increases also slowed, while inventories fell.

This is in contrast to Federal Reserve Bank of Philadelphia's regional factory index, another key measure of US manufacturing activity, which reported a drop below expectations on Thursday.

Overall, this week's data shows the US economy is still going strong, even amid concerns over potential interest rate hikes later this year.

How does the economy feel to you? What are you most concerned about in today's economy? Reach out to this reporter at nsheidlower@insider.com.