The Dividend Economic Weather Report

Tracking this information down from all over the internet used to drive me crazy (and make my eyes roll due to unwanted opinions). This report is from our wonderful AI assistant without all of the commentary. Just numbers applied to historical economic meaning. ~ Chuck

Economic Crosscurrents: A Tale of Two Signals

The economic landscape in May 2025 presents a complex picture of divergent indicators that dividend investors should carefully consider. While the underlying economy continues to demonstrate resilience through GDP growth, several concerning trends are emerging that warrant close attention.

We track PMI and basic FRED (Federal Reserve Economic Data) on Everdend.com, you can find it here with more details.

Manufacturing Weakness Amid Broader Growth

The most notable development is the continued contraction in manufacturing activity, with the PMI declining to 48.7 in April from 49.0 in March. This marks another month below the critical 50 threshold, signaling ongoing weakness in the industrial sector. For dividend investors, this manufacturing softness could pressure earnings for industrial companies and utilities that serve manufacturing clients, potentially affecting their ability to maintain or grow dividend payments.

However, this sector-specific weakness exists alongside broader economic expansion, as evidenced by Real GDP growth to $29.978 trillion in Q1 2025 from $29.500 trillion in Q4 2024. This suggests that while manufacturing struggles, other sectors—particularly services—are picking up the slack and driving overall economic growth.

Persistent Inflation Creates Policy Complications

The inflation picture remains stubbornly elevated, with both headline CPI (320.321) and Core CPI (326.43) showing continued upward momentum in April. This persistent price pressure creates a challenging environment for both policymakers and dividend investors. Companies face ongoing cost pressures that may squeeze margins, while the Federal Reserve's monetary policy remains constrained by the need to combat inflation.

The slight reduction in the Fed Funds Rate to 4.33% from 4.50% suggests the central bank may be attempting to balance growth concerns against inflation risks. However, the simultaneous rise in the 10-Year Treasury Yield to 4.28% indicates that bond markets remain skeptical about the inflation trajectory and expect higher long-term rates.

Labor Market Stability Provides Foundation

The unemployment rate holding steady at 4.2% offers a bright spot in the economic picture. This stable employment environment supports consumer spending power and provides a foundation for continued economic growth. For dividend-paying companies, particularly those in consumer-facing sectors, this employment stability helps underpin revenue streams and supports dividend sustainability.

Implications for Dividend Strategy

The current economic environment suggests a selective approach to dividend investing. The combination of manufacturing weakness, persistent inflation, and rising long-term interest rates creates headwinds for certain sectors while potentially benefiting others.

You can read more about how these indicators and indexes are used here: Sector Rotation for Dividend Stability

Sectors to Consider:

• Utilities and consumer staples may benefit from stable employment and consumer spending
• Financial services could see improved net interest margins if the yield curve normalizes
• Energy and materials companies may continue benefiting from inflationary pressures

Areas of Caution:

• Industrial and manufacturing-focused dividend payers face sector-specific headwinds
• Interest-sensitive sectors like REITs may struggle with rising long-term rates
• Companies with high debt loads could face increased financing costs

Looking Ahead

The economic data suggests we're in a transitional period where growth momentum remains positive but faces increasing crosscurrents. The divergence between manufacturing weakness and overall GDP growth, combined with persistent inflation and evolving monetary policy, creates both opportunities and risks for dividend investors.

Success in this environment will require careful sector selection and close attention to individual company fundamentals, particularly balance sheet strength and the sustainability of dividend coverage ratios.

The coming months will be critical in determining whether manufacturing weakness spreads to other sectors or remains contained, and whether inflation pressures begin to moderate sufficiently to allow for more accommodative monetary policy.