Mixed Signals Emerge as GDP Cools, the Fed Holds, and Confidence Softens

Matthew Rubin Chief Investment Officer

 

1. Consumer spending offset a broader slowdown in second-quarter economic growth, while cooling but still-elevated core inflation added pressure to the Federal Reserve’s rate outlook.
2. The Federal Reserve (Fed) kept its benchmark rate unchanged amid rising geopolitical uncertainty, though three dissenting votes and a pointed signal from the Chair suggest tighter policy could come as soon as September.
3. The Conference Board Consumer Confidence Index fell short of forecasts in July, with households’ assessments of labor and business conditions declining for a third consecutive month.

 

1. GDP Growth Cools as Consumer Spending Carries the Load

The U.S. economy grew at an annualized rate of 1.5% in the second quarter, according to the advanced estimate released last week.¹ That fell short of the 2.0% consensus forecast² and slowed from 2.1% in the first quarter.¹ Personal consumption remained the primary engine for growth, rising 3.2%¹ and surpassing the 2.3% consensus expectation.² Household spending continues to support the broader economy even as other components pull in the opposite direction.

Government spending and net exports both weighed on growth last quarter.¹ Trade continues to act as a headwind on the headline figure.

On inflation, the Personal Consumption Expenditures (PCE) Price Index rose 3.7% year over year in June, down from 4.1% the prior month.³ Core PCE, the Fed’s preferred inflation gauge, edged lower to 3.3% from 3.4%,³ meeting forecasts.² Still, core inflation sits well above the Fed’s 2.0% target. If conditions hold heading into the September 16^th Federal Open Market Committee (FOMC) meeting, the Fed may feel pressure to raise the federal funds rate to 3.75%–4.0%.

2. Federal Reserve Holds Rates but Signals Readiness to Act

The Fed held its benchmark federal funds rate steady at 3.50%–3.75% last Wednesday, due in part to the ongoing conflict in the Middle East and rising energy prices.⁴ The decision was not unanimous: Three officials dissented in favor of an immediate rate increase, reflecting concern over persistent inflation and a resilient labor market.⁴

Chair Kevin Warsh noted that rising bond yields had already provided a tightening effect on their own, giving the committee room to pause.⁴ He reinforced that further action remains on the table if conditions hold steady.

The September 16^th FOMC meeting is shaping up to be a potential inflection point. The probability of a rate increase to 3.75%–4.0% rises if geopolitical tensions persist and oil prices continue to climb.⁴ Inflation data for July and August will be the primary inputs shaping that outcome.

3. Consumer Confidence Slips as Labor Market Perceptions Continue to Soften

The Consumer Confidence Index edged lower in July, slipping to 90.8 from an upwardly revised 92.2 in June.⁵ The result came in below the consensus forecast of 92.3.²

The Present Situation Index, which reflects consumers’ assessment of current business and labor market conditions, fell 3.6 points to 114.9, extending a three-month slide.⁵ The Expectations Index, which captures the short-term outlook for income, business, and labor conditions, was flat at 74.7.⁵

Perceptions of the labor market also softened. The labor market differential, which measures the gap between those viewing jobs as plentiful versus hard to find, ticked down to 3.1%.⁵ Economists watch this figure closely as a gauge of how tight labor conditions feel at the household level.

Looking Ahead

1. JOLTs Job Openings – Tuesday, August 4^th
2. ISM Services PMI – Wednesday, August 5^th
3. Nonfarm Payrolls – Friday, August 7^th

Why It Matters

Tuesday’s JOLTs report will offer an update on labor demand, with job openings expected to pull back modestly from June’s 7.6 million,² a figure markets will watch closely given the Fed’s focus on labor market resilience. Wednesday’s ISM Services PMI will test whether the services sector, the primary driver of U.S. economic activity, held its footing in July following a softer composite PMI reading. The week’s main event arrives Friday, when the July jobs report is expected to show nonfarm payrolls of around 79,000 and an unemployment rate holding steady at 4.2%.² With the September FOMC meeting shaping up as a potential inflection point on rates, this week’s labor data will carry added weight.

For the period ending 7/31/26.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Bureau of Economic Analysis, Gross Domestic Product, Second Quarter 2026 (Advance Estimate), July 2026
² Bloomberg
³ U.S. Bureau of Economic Analysis, Personal Income and Outlays, June 2026, released July 30, 2026
⁴ Federal Reserve, Federal Open Market Committee Press Release, July 2026
⁵ The Conference Board, Consumer Confidence Survey Press Release, July 2026

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The Personal Consumption Expenditures (PCE) Price Index measures the change over time in prices paid by U.S. consumers for goods and services. Published monthly by the Bureau of Economic Analysis (BEA), it is the Federal Reserve’s preferred measure of inflation and is used to assess progress toward the Fed’s 2% inflation target. The PCE Price Index differs from the Consumer Price Index (CPI) in its scope, weighting methodology, and treatment of certain healthcare expenditures; it generally registers a slightly lower inflation rate than CPI.
The Core Personal Consumption Expenditures (PCE) Price Index measures inflation in consumer spending after excluding food and energy prices, which tend to be more volatile. Published monthly by the Bureau of Economic Analysis (BEA) alongside the headline PCE, Core PCE is closely monitored by the Federal Reserve as a signal of underlying, persistent inflation trends. Because it strips out short-term price fluctuations in commodities and fuel, it is considered a more stable indicator of the direction of inflation over time.
The PCE Price Index family includes both the headline Personal Consumption Expenditures Price Index and the Core PCE Price Index, published monthly by the Bureau of Economic Analysis (BEA). The headline index captures price changes across all goods and services consumed by U.S. households; the core variant excludes food and energy to isolate underlying inflation trends. Together, these measures serve as the Federal Reserve’s primary inflation benchmarks in evaluating monetary policy, including decisions regarding the federal funds rate target.
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index.
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 2000^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2026001_28