Chief Economist Eugenio J. Alemán discusses current economic conditions.
Consumption spending surprised to the upside once again in August, something we had already seen from last week’s release of retail and food services sales during the same month. However, growth in incomes is not accompanying this growth in consumption, and since lower-income households are maxed out, it is clear that financial gains are driving the recent acceleration in personal consumption expenditures.
Having said this, the Bureau of Economic Analysis once again revised the income numbers higher going back and thus presented a better picture of the state of households compared to what we had before, which puts today’s stronger consumption print under a better footing. However, the recent weakness in employment over the last several quarters and the increase in prices due to the impact of tariffs is going to hit consumers’ ability to keep pace with these rates of growth in consumer spending.
Higher-income consumers are probably relying on financial gains to continue to spend but lower-income consumers are struggling. If employment numbers continue to deteriorate, the recent strength of consumer demand will be challenged as we enter the last quarter of the year.
Economic growth better than previously reported in Q2 2025
One week after the end of the September Federal Open Market Committee (FOMC) meeting where the Federal Reserve lowered the federal funds rate by 25 basis points and the dot plot showed that Fed members were expecting to lower interest rates by 50 basis points before the end of the year, new and revised economic news is throwing a bucket of cold water on those expectations.
The Bureau of Economic Analysis (BEA) reported that economic growth during the second quarter of the year was revised up to a quarter-over-quarter seasonally adjusted rate of 3.8% on the back of higher personal consumption in services and a stronger nonresidential investment profile, especially real investment in equipment, which has been booming due to the CHIPS and IRA acts, and now stronger investment in equipment and software related to AI.
Trade in goods was also much more supportive in August, as firms reversed the large increase in imports recorded in July in advance of the increase in tariffs in August, with the non-seasonally adjusted trade deficit in goods dropping from $117.1 billion in July to $84.2 billion in August as both exports and imports of goods declined by 1.3% and 7.0%, respectively compared to July.
Meanwhile, new orders of durable goods were stronger than expected in August as new orders of transportation equipment, mostly defense and nondefense aircraft new orders, reversed the decline from the previous months. However, even if we stripped out large transportation items from new orders, the headline number was stronger than expected and recorded its fifth consecutive month-on-month advance.
Although we are still expecting employment growth weakness to continue, the argument that economic growth was slowing down is less certain today than it was a week ago, which will continue to complicate the Fed’s decision-making process. Today, the argument by the dovish members of the Fed is less supported than before and while we do expect overall weaker economic growth during the last quarter of the year, growth so far continues to surprise to the upside, which is inconsistent with the market’s view of two more rate cuts before the end of the year, especially if inflation continues to move higher.
A partial DOGE reversal seems to be in the offing
Although it is very difficult to know what is actually happening, recent news reports are pointing to a process of reversal of federal workers’ layoffs happening across the agencies most affected by such cuts earlier in the year. Some of the workers who have remained on the payroll but have not worked for more than five months have received letters telling them to report back to work on September 29, just two days before the end of the government’s fiscal year.
This decision is not going to affect those workers who accepted early retirement through the “Fork in the Road” (or Deferred Resignation Program), which, according to several sources, has been estimated at approximately 75,000. Furthermore, nobody knows at this time how many of the other estimated 125,000 to 225,000 workers who are still on the payroll due to court injunctions are being brought back to work. This means that although we are going to see some negative numbers coming from government workers dropping out during the next several months, our previous expectation that at most 300,000 workers are going to start dropping out of the employment numbers during the next several quarters is probably down considerably, depending on how many are being recalled back to work.
Furthermore, the potential for a government shutdown as early as next week will add to this uncertainty if it comes to fruition. Thus, we will have to wait and see how this process evolves, but for now, it is better news for the labor market and for the performance of the economy.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA HPI is a broad measure of the movement of single-family house prices. The FHFA HPI is a weighted, repeat- sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
The ISM Manufacturing Index: The GDP Now Institute of Supply Management (ISM) Manufacturing Measures the health of the manufacturing sector by surveying purchasing managers at manufacturing firms. The survey asks about current business conditions and expectations for the future, including new orders, inventories, employment, and deliveries.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
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The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 7/25/2025
