Economic Outlook - August 2026
- Real gross domestic product (GDP) increased at an annual rate of 2.1% in the first quarter of 2026 according to the third estimate released by the U.S. Bureau of Economic Analysis. According to the Bureau’s advanced estimate (7-30-26), second quarter GDP grew at 1.5%. This is a preliminary estimate, subject to revision. We project the GDP growth rate for all of 2026 in the 2.0% range.
- The latest batch of economic data reinforces the view of a resilient economy able to withstand more of the recent shocks. These shocks include supply-chain disruptions in the Middle East, another round of tariffs and soaring semiconductor prices driven by artificial intelligence (AI) infrastructure investments.
- June durable goods orders, excluding transportation, increased 0.6%, while core capital goods orders (nondefense ex-aircraft), a key gauge of business investment, rose 0.9% and 12.5% year over year. This is the strongest annual increase since November 2021. AI is a promising technology but still in the early stages of widespread AI adoption. Thus, it is difficult to estimate whether all the capital spending on AI infrastructure will or will not generate good returns on invested capital in the coming years. However, we do know that the hundreds of billions of dollars being spent on AI now continue to benefit U.S. economic growth.
- The ISM Manufacturing Purchasing Managers’ Index (PMI) came in at 55.6 in July, indicating expansion in the manufacturing sector, as readings above 50 signal growth. Manufacturing activity is a good indicator of the health of the overall economy.
- Inflation: Consumer prices were up 3.5% in June from a year earlier, beating analyst expectations of 3.8% and improving from the 4.2% inflation rate in May. The Middle East “on again/off again” conflict has generated volatile oil prices that, in turn, influence inflation.
- The case for the Federal Reserve raising rates in July rested on the premise that inflation levels above the Fed’s 2% goal for a stable currency were becoming entrenched. Meaning the simultaneous shocks of tariffs, armed conflict, oil prices and the artificial-intelligence build-out were bleeding into the broader price level rather than washing through it. One month doesn’t settle that. But it did remove the immediate justification for the Federal Reserve to raise rates in July. In a split decision, the Fed decided to hold the federal funds rate unchanged. Three Federal Reserve Bank Presidents voted to increase rates.
- Inflation risks still outweigh labor market risks. The labor market remains healthy. The ratio of open positions to people seeking employment is 1.0, a historically strong indication of labor supply and demand. Normally, job seekers substantially outnumber open jobs.
Sources: FactSet, Yardeni Research, U.S. Bureau of Economic Analysis, The Federal Reserve, U.S. Bureau of Labor Statistics, The Wall Street Journal
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