U.S. economic outlook: Uneven growth and a Fed on hold

Key Themes

• The economy is expanding, but the mix is uneven. Real GDP growth rose at a 1.5% annualized pace in Q2, with solid consumer spending and AI-related capex offsetting drags from net exports and inventories. Growth remains resilient, but concentrated.
• AI investment remains a key shock absorber. High-tech related investment continues to support growth, though the boost is being partly diluted by stronger tech-related imports. There are also tentative signs investment is broadening as delayed capex plans move forward and inventory rebuilding gains traction.
• Consumer spending is holding up, but upside looks limited. Q2 spending remained solid, but support from tax refunds has faded, real income growth is soft and the saving rate is already low. That leaves consumption exposed to a cooler jobs market.
• The labor market does not look as stable. Recent hiring and wage data suggest labor demand is still soft, shifting the risks away from overheating and toward a more meaningful cooling in employment growth. Supply and demand in the jobs market remains balanced, but the margin for error has narrowed.
• Inflation remains elevated, but the trend is improving. Recent inflation data suggest some of the recent upward pressure from tariffs and energy is fading. Core services inflation is cooling, and broader price pressures show signs of easing. While inflation remains above target, the recent upturn appears narrow rather than broad-based.
• The Fed remains stuck on hold. Inflation is still above target, but the softer labor backdrop makes a hawkish pivot harder to justify. Patience remains the path of least resistance. As long as inflation remains concentrated in areas monetary policy cannot easily influence, such as energy and AI-related demand, the Fed is likely to stay put. A broader pickup in price pressures, however, would warrant a firmer policy response.

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