Economic Outlook - October 2026
- Real U.S. gross domestic product (GDP) annualized growth rates reflect a strengthening economy. The latest second quarter revision was adjusted upward to 2.2%, well above the 1.5% that was previously reported. Commerce Department data attribute stronger economic growth to resilient consumer spending and a major surge in gross private domestic investment. Fed surveys indicate third quarter GDP growth has accelerated with forecasts ranging from 2.3% to 2.5% growth rates on an annualized basis. Business spending increased over 10% year-on-year for capital goods, including data centers and related technology equipment. The investment boom, driven by the artificial intelligence infrastructure build-out, provides support to economic growth, while a soft housing market was a drag on residential investment. Tariffs also provided a headwind to trade with net exports slightly negative.
- August Consumer Price Index (CPI) and Producer Price Index (PPI) data precipitated a unanimous quarter-point interest rate move by the Federal Reserve’s rate-setting committee. The rate increase raises the benchmark federal funds rate to a range of 3.75-4.0%. Additionally, 16 of 18 participant members of the Fed’s interest rate-setting committee, penciled in one more rate hike this year. For stocks, a hiking cycle would tighten financial conditions and could pressure both earnings growth and valuation multiples.
- U.S. Bureau of Economic Analysis (BEA) implemented significant changes to its methodology for calculating the Personal Consumption Expenditures (PCE) price index effective September 30, 2026 and retroactive five years. The revision corrected arguably flawed data and created a downward shift in inflation measurements. August inflation data was lowered by roughly 0.3% due to the methodology change. Annualized core PCE for the twelve months through August was cooler than expected at 3.0% compared to 3.3% expected, largely due to the one-time adjustment. The improved inflation data may remove pressure for the Fed to raise rates at the October meeting.
- Higher prices are not yet holding back consumer spending. The Commerce Department reported August core retail sales much stronger than expected, increasing 1.4% following a 0.4% contraction in July. According to surveys, businesses consistently characterize stable demand for everyday items through summer and value-oriented spending into the back-to-school season. Concerns linger about discretionary big-ticket categories and holiday spending as higher-for-longer interest rates and gasoline prices pressure wallets.
- Average 30-year mortgage rates recently surpassed 7%, which has historically been a psychological barrier for home buyers. Higher rates will challenge an already soft housing market in other ways, too. Recent national home sale trends favored new construction over existing-home sales, which dipped 2% in August. Homebuilders have offered mortgage rate buydowns to stimulate growth, but will find margins squeezed, possibly disincentivizing further building. Sellers may be reluctant to give up 2-3% mortgage rates.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, S&P Global, U.S. Bureau of Economic Analysis, Commerce Department, U.S. Federal Reserve, National Bureau of Homebuilders
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