Robust Growth vs. Consumer Pessimism
The S&P 500 closed 0.10% lower this week as economic data revealed a mixed picture with some sectors cooling while others show continued resilience. This week's reports—from housing and manufacturing to consumer sentiment—painted different stories across the economy, with the Atlanta Fed's latest 3.5% third-quarter GDP estimate suggesting underlying momentum remains stronger than many expected.
The data creates a puzzle for the Fed: consumer sentiment fell while spending stayed strong, and inflation expectations ticked higher just as rate cuts loom, setting up a delicate balancing act for September.
Summary
The U.S. economy is navigating a complex period with recent data revealing sector-specific adjustments rather than broad-based weakness. While second-quarter GDP growth came in stronger than expected at 3.3%, the Atlanta Fed's latest projection of 3.5% growth for the third quarter suggests underlying momentum may be more persistent than initially thought.
Housing Market Rebalancing
The housing sector shows the clearest signs of normalization. New home sales fell modestly in July despite builders cutting prices and offering aggressive incentives. The median new home price dropped 5.9% from last year to $403,800, yet sales remain constrained by mortgage rates near 7% and a fundamental affordability crisis. This reflects both current economic realities and structural changes—the average new home has grown 133% in size since the 1920s, making affordability more acute with historically normal interest rates.
The Case-Shiller index showed price growth slowing to just 1.9% annually—below inflation for the first time in years. Regional divergences are stark, with former pandemic boom markets like Tampa seeing outright price declines while traditional metros like New York and Chicago continue posting solid gains.
Manufacturing Resilience Despite Headwinds
The manufacturing sector presents a more nuanced picture. Durable goods orders fell 2.8% in July, but this weakness was concentrated in volatile transportation equipment. Excluding aircraft and vehicles, orders actually rose 1.1%, while shipments continued their eight-month winning streak. This suggests companies are becoming more selective about investments, but the underlying industrial economy remains functional.
Consumer Pressures Mount
Consumer dynamics present the most concerning trend. The University of Michigan sentiment index fell to 58.2 in August, with inflation expectations ticking higher for the first time in months. Americans now expect 4.8% inflation over the next year, up from 4.5% in July.
Despite this pessimism, consumers continue spending. Personal consumption expenditures rose 0.5% in July while income grew just 0.4%, forcing Americans to dip into savings. The personal savings rate fell to 4.4%, and core PCE inflation accelerated to 2.9%—well above the Fed's 2% target.
Labor Market Shows Selective Cooling
The employment picture reflects measured moderation. Initial jobless claims remain low at 229,000, but continuing claims near 1.95 million suggest people who lose jobs are taking longer to find new ones. This "no-hire, no-fire" environment indicates companies are holding onto workers but becoming more cautious about new hires.
Policy Implications
For the Federal Reserve, these mixed signals create a delicate balancing act. The combination of resilient growth momentum with persistent inflation pressures may support a measured 25 basis point cut in September rather than more aggressive action.
The overarching theme is an economy transitioning from pandemic recovery conditions toward more balanced but still-robust growth. This represents selective rebalancing across sectors rather than broad-based weakness, testing both consumer resilience and policymaker flexibility.
The Details
New Residential Sales for July showed sales fell 0.6% to 652,000 units, continuing a slow decline that started after the pandemic housing boom. The bigger concern is the 8.2% drop compared to last July, showing that high mortgage rates and expensive home prices are keeping buyers on the sidelines. Home prices did fall slightly—the typical new home sold for $403,800, down 5.9% from a year ago. But with 9.2 months of available inventory, there are far more homes for sale than the balanced 6-month supply that signals a healthy market.
This shift reveals a new reality for housing. Builders are cutting prices and offering deals to attract buyers, but many people still can't afford to buy. The problem isn't just a lack of homes anymore—it's that the homes being built cost too much for most families to finance at today's interest rates. Part of this challenge stems from our expectations of what a home should be. The average newly built American home has grown 133% since the 1920s, expanding from 1,048 square feet to 2,440 square feet today. Combined with mortgage rates that are actually closer to historical norms—the long-term average for a 30-year loan is 7.75%—it's simple math why affordability has become such a problem. Smaller homes would be more affordable at these more typical interest rates.
(Source: U.S. Census Bureau and Department of Housing and Urban Development, "New Residential Sales," August 2025.)
Durable Goods Orders fell 2.8% in July to $302.8 billion, marking the third drop in four months. But dig beneath the headline and a different story emerges: excluding transportation equipment, orders actually rose 1.1%. The weakness was concentrated in aircraft and vehicle orders, which plunged 9.7% and have been particularly volatile this year.
Meanwhile, manufacturers kept busy filling existing orders. Shipments climbed 1.4% for the eighth straight month, suggesting factories are working through their backlogs even as new business slows. Core capital goods—machinery, computers, and metal products—showed steady demand, with orders up across most categories. This split tells us that while some big-ticket purchases are being delayed, the broader industrial economy remains functional. Companies are still investing in equipment and infrastructure, just more selectively than during the post-pandemic boom.
(Source: U.S. Census Bureau, "Advance Report on Durable Goods Manufacturers' Shipments, Inventories and Orders," August 2025.)
S&P CoreLogic Case-Shiller Home Price Index showed home prices rising just 1.9% nationally in June—the slowest pace since summer 2023 and a clear sign that the housing market is cooling off. This marks five straight months of slowing growth, down from 2.3% in May. More telling is that home prices are now losing ground to inflation, which ran 2.7% over the same period. For the first time in years, homeowners aren't building real wealth through appreciation.
The regional story tells us even more. While places like New York and Chicago saw solid gains of 7% and 6.1% respectively, former pandemic darlings are struggling. Tampa prices actually fell 2.4% from last year, and Phoenix barely stayed positive. Seven cities are now seeing outright declines—a stark reversal from the boom years when every market seemed to rise together.
What we're seeing isn't a crash but a rebalancing. High mortgage rates near 7% have sidelined many buyers, while the "rate lock-in" effect keeps sellers with cheap mortgages from listing their homes. The result? Fewer transactions, more inventory, and prices that are finally responding to economic gravity rather than pandemic-era speculation.
(Source: S&P Dow Jones Indices, "S&P CoreLogic Case-Shiller Home Price Index," August 2025.)
Weekly Jobless Claims fell to 229,000 last week, down 5,000 from the prior week and roughly in line with what economists expected. At first glance, that looks reassuring—we're nowhere near the 250,000 to 300,000 level that typically signals real trouble in the job market. But the four-week average has been creeping higher, from around 222,000 in early August to 228,500 now, suggesting the labor market is gradually cooling rather than staying rock solid.
The more telling number might be continuing claims, which measure people who remain on unemployment benefits. That figure sits near 1.95 million—close to a three-year high. It's not that companies are suddenly firing everyone, but people who do lose their jobs are taking longer to find new ones. We're seeing what economists call a "no-hire, no-fire" environment where layoffs stay low but hiring has slowed significantly.
For the Fed, this creates an interesting balancing act. The data supports their shift toward potentially cutting rates without screaming "emergency." Chair Powell opened the door to rate cuts at Jackson Hole, and these numbers—soft enough to justify easing but not weak enough to panic—fit perfectly with a measured 25 basis point cut in September rather than something more dramatic.
(Source: U.S. Department of Labor, "Unemployment Insurance Weekly Claims Report," August 2025.)
Gross Domestic Product grew at a 3.3% annual rate in the second quarter—stronger than the initial 3.0% estimate and a sharp turnaround from the first quarter's 0.5% contraction. At first glance, this looks like robust growth that should ease recession fears. But dig deeper and the picture gets more complicated.
Much of that headline strength came from a technical boost: imports plunged about 30%, and since imports subtract from GDP calculations, their decline automatically inflates the growth number. This likely reflects businesses front-loading purchases in early 2025 to beat expected tariffs, creating an artificial swing between quarters. Strip out these trade distortions and look at core domestic demand—what economists call "final sales to private domestic purchasers"—and growth was a more modest 1.9%.
Consumer spending did accelerate to 1.6% from just 0.5% in the first quarter, showing households are still willing to spend despite higher borrowing costs. But business investment was mixed, and the underlying momentum remains fragile. Core inflation also cooled to 2.5% on an annualized basis, continuing the gradual drift toward the Fed's 2% target.
For the Fed, this creates a delicate balancing act. The strong headline number argues against aggressive rate cuts, but the softer underlying demand and cooling inflation support their shift toward easing. Markets are still pricing in a quarter-point cut in September, and this report probably doesn't change that calculus.
(Source: U.S. Bureau of Economic Analysis, "Gross Domestic Product, Second Quarter 2025," August 2025.)
Pending Home Sales fell 0.4% in July to an index level of 71.7, marking the third decline in four months as the housing market continues its sluggish pace. While the monthly drop was modest, it extends a pattern of weakness that started with April's sharp 6.3% plunge. The only bright spot came from a 0.7% year-over-year gain—the first positive comparison since early 2023—but that's mainly because last July was so weak.
What's keeping buyers on the sidelines is simple math. Despite mortgage rates falling to a 10-month low of 6.56%, the typical existing home still costs $422,400—a price that requires significant income to afford at today's borrowing costs. Contract signings today predict closings in September and October, so we're looking at continued soft existing-home sales through early fall.
For the Fed, this data supports their cautious approach—housing isn't crashing, but it's clearly not adding any growth momentum either. The weakness means less activity generating broker commissions and move-related spending, both of which show up in GDP calculations as small drags on economic growth.
Source: National Association of Realtors, "Pending Home Sales Index," August 2025.
Personal Income and Outlays, - The Bureau of Economic Analysis released its monthly for July. This report tracks Personal Consumption Expenditures (PCE), which measures how much money Americans spend on goods and services, along with personal income data. PCE is a key indicator that helps economists and policymakers understand the health of the U.S. economy and make important decisions about interest rates and economic policy.
Key findings from the July 2025 PCE report include:
• Americans Spent More Than They Earned: PCE jumped 0.5% in July ($108.9 billion more than June), while personal income only grew 0.4%. This means people are spending more aggressively, showing confidence in the economy but also dipping into their savings to afford purchases.
• Service Spending Leads the Way: Most of the increased PCE went toward services like restaurants, healthcare, and entertainment ($60.2 billion) rather than physical goods like cars or clothes ($48.7 billion), continuing a long-term trend in how Americans spend their money.
• Inflation Concerns Rise: While overall price increases stayed at 2.6% compared to last year, "core PCE inflation" (which excludes volatile food and gas prices) jumped to 2.9% annually. This is well above the Federal Reserve's 2% target and suggests prices are rising faster than desired.
• Savings Rates Drop: Americans saved 4.4% of their income in July, down from 4.5% in June, with total savings falling to $985.6 billion. This decline shows people are becoming more willing to spend their saved money to maintain their lifestyle.
• Strong Job Market Boosts Paychecks: Income growth was primarily driven by higher wages, with private sector workers earning $77.5 billion more (mostly in service jobs) and government workers earning $5.1 billion more, reflecting a tight job market where employers are competing for workers.
The July data shows the U.S. economy is being powered by strong consumer demand, likely supported by good job opportunities and rising wages. However, the combination of accelerating PCE inflation and declining savings presents a complex picture for policymakers. While the Federal Reserve has signaled potential rate cuts ahead, the uptick in core inflation to 2.9% may complicate those plans, as sustained price pressures could conflict with efforts to stimulate economic growth through lower borrowing costs.
(Source: U.S. Bureau of Economic Analysis, Personal Income and Outlays, July 2025)
The University of Michigan's Final Consumer Sentiment Report for August showed Americans feeling more pessimistic about the economy. The sentiment index fell to 58.2, down 5.7% from July and 14.3% below last year's level. The decline was broad-based, hitting consumers across all income and age groups. Most concerning was the sharp drop in buying conditions for big-ticket items like cars and appliances, which fell to their lowest level in a year as people cited high prices as their main worry.
The real trouble spot was inflation expectations, which ticked higher for the first time in months. Americans now expect prices to rise 4.8% over the next year, up from 4.5% in July. This matters because when people expect higher inflation, they often change their behavior in ways that can make those expectations come true—rushing to buy before prices rise further or demanding higher wages. For the Federal Reserve, this creates a delicate balancing act between supporting a weakening economy and preventing inflation from getting out of control again.
(Source: University of Michigan Surveys of Consumers, August 2025.)
By The Numbers
Employment Indicators
Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.
| Indicator | Current Value | Status |
|---|---|---|
| Initial Claims for Unemployment | 229,000
|
Stable |
| 4-Week Average of Initial Claims | 228,500
|
Stable |
| 4-Week Average of Continuing Claims | 1.956M
|
Rising |
| Unemployment Rate | 4.2% | Rising |
Note: Values above 250K for the 4-Week Average, combined with rising unemployment, could signal a weakening economy.
Next unemployment report: September 5, 2025. Source: Department of Labor
Economic Growth (Real GDP)
| Period | Growth Rate | Status |
|---|---|---|
| Q4 2024 | 2.4% | Slowing |
| Q1 2025 | -0.5% | Contraction - Consider the average of Q1 & Q2 due to tariff distortions = 1.4% |
| Q2 2025 | 3.3% | Recovery - Consider the average of Q1 & Q2 due to tariff distortions = 1.4% |
| Q3 2025 (est.) | 3.5% | Expanding |
GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Estimate from Federal Reserve Bank of Atlanta
Inflation Measures (CPI Year-over-Year)
| Month | Rate | Trend |
|---|---|---|
| September | 2.44% | Improving |
| October | 2.60% | Deteriorating |
| November | 2.75% | Deteriorating |
| December | 2.89% | Deteriorating |
| January 2025 | 3.00% | Deteriorating |
| February | 2.82% | Improving |
| March | 2.39% | Improving |
| April | 2.31% | Improving |
| May | 2.35% | Deteriorating |
| June | 2.67% | Deteriorating |
| July | 2.70% | Deteriorating |
| August (est.) | 2.84% | Deteriorating |
Source: Bureau of Labor Statistics; Estimate from Federal Reserve Bank of Cleveland
Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.
| CME FedWatch Tool - Conditional Meeting Probabilities | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Meeting Date | 175-200 | 200-225 | 225-250 | 250-275 | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 |
| 9/17/2025 | 0.0% | 0.0% | 0.0% | 0.0% | 87.1% | 12.9% | |||||
| 10/29/2025 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 46.5% | 47.4% | 6.0% |
| 12/10/2025 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 38.9% | 47.3% | 12.9% | 1.0% |
| 1/28/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 18.1% | 42.8% | 31.3% | 7.3% | 0.5% |
| 3/18/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 10.6% | 32.6% | 36.0% | 17.2% | 3.3% | 0.2% |
| 4/29/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 4.0% | 18.8% | 33.9% | 29.0% | 12.0% | 2.2% | 0.1% |
| 6/17/2026 | 0.0% | 0.0% | 0.0% | 2.6% | 13.7% | 28.7% | 30.7% | 17.9% | 5.6% | 0.8% | 0.0% |
| 7/29/2026 | 0.0% | 0.0% | 1.0% | 6.7% | 19.3% | 29.4% | 25.9% | 13.3% | 3.8% | 0.5% | 0.0% |
| 9/16/2026 | 0.0% | 0.4% | 3.4% | 12.1% | 23.6% | 27.9% | 20.5% | 9.2% | 2.4% | 0.3% | 0.0% |
| 10/28/2026 | 0.1% | 1.1% | 5.5% | 14.8% | 24.6% | 26.2% | 17.9% | 7.6% | 1.9% | 0.3% | 0.0% |
| 12/9/2026 | 0.3% | 2.0% | 7.4% | 16.9% | 25.0% | 24.4% | 15.7% | 6.4% | 1.6% | 0.2% | 0.0% |
Understanding This Data:
- This data shows market probabilities for Fed rate decisions
- Probabilities come from federal funds futures pricing
- Each percentage shows likelihood of rates at that level after each meeting
- Blue highlighted cells show highest probability for each meeting
- These are market expectations not Federal Reserve guidance
- Probabilities depend on all previous meeting outcomes
Source: CME Group FedWatch Tool
Data Extracted: August 29, 2025 at 11:31 AM
Note: Data is subject to market conditions and changes continuously. Please verify current probabilities at CME Group's website.
| Date | 2025 Earnings Estimate | 2026 Earnings Estimate | Trend |
|---|---|---|---|
| June 28, 2024 | $276.29 |
|
|
| Sept 30, 2024 | $274.73 |
|
Deteriorating |
| Dec 31, 2024 | $271.25 |
|
Deteriorating |
| Mar 31, 2025 | $266.39 | $304.89 | Deteriorating |
| June 30, 2025 | $255.29 | $295.32 | Deteriorating |
| Current | $258.36 | $300.69 | Stable |
Source: S&P Dow Jones Indices
Disclosure:
This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.
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