The last letter left two questions hanging: what the July minutes would reveal about a committee that had argued its way to a hold, and whether the summer calm in inflation would survive contact with rising prices at the pump. Both found answers, and the more consequential one arrived from a podium in Wyoming rather than from any data release. Chair Kevin Warsh used his first Jackson Hole keynote to tell the market that policy is not restrictive, inflation is falling too slowly and the market obligingly delivered the tightening he declined to deliver himself.

Executive Summary

• Chair Warsh used his Jackson Hole keynote to reaffirm 2% Personal Consumption Expenditures (PCE) inflation as a firm, fixed target to argue that current policy settings are not restrictive, and to conclude that underlying inflation is not falling fast enough.
• Markets read the speech as a hawkish turn, shifting the September decision to a coin toss from roughly one-in-three odds of a hike and pricing two increases over the coming year.
• The preliminary benchmark revision trimmed March nonfarm payrolls by 79,000, which would lower average monthly job growth in the year through March to 16,000 from 23,000, a modest adjustment beside the 861,000 final revision for 2025.
• Second-quarter gross domestic product (GDP) growth held at 1.5% annualized, with an upward revision to consumption offset by weaker net exports, while corporate profit margins reached a record high. According to Haver Analytics, Core PCE inflation is forecasted to finish the year near 3.2% before easing to 2.3% by December 2027.
• The University of Michigan consumer sentiment index fell to 51.7 in August from 55.2, with the steepest decline among Republican respondents, while the Conference Board measure slipped to 89.4 from 90.2 on the weakest expectations reading since January.
• Housing stayed in its rut, with starts down 12.4% in July even as permits rose 5%, and new home sales down 10.5% with mortgage rates at 6.65%.
• The advance goods trade deficit widened $17.4 billion to $118.8 billion, its largest since the first quarter of 2025, on an 11.3% surge in capital goods imports tied to the artificial intelligence (AI) buildout.

Jackson Hole: The Speech Was the Tightening
Mountain air apparently agrees with Chair Warsh. In a wide-ranging keynote he delivered the clearest account of his monetary policy views since taking the job with what appeared to be three hawkish shifts inside it. First, after months of studied ambiguity, he reaffirmed that 2% inflation on the PCE measure is a firm, fixed target. Second, he implied that policy settings are not restrictive, a departure from the slightly restrictive language of former Chair Jerome Powell and from a dot plot in which most members place the policy rate above their longer-run neutral level. His evidence was the strength of business capital spending, profits, low corporate credit spreads and looser borrowing conditions, housing weakness notwithstanding. Third, he argued that underlying inflation is moderating too slowly, and that the summer readings did not show meaningful improvement.

His preferred evidence was breadth rather than level. Roughly half the PCE basket is now rising by more than 3% a year, a share that keeps falling but still sits above the 32% average of the two decades before the pandemic. Markets took the point. The September decision moved to a coin toss from roughly one-in-three odds of an increase, and futures now carry two hikes over the coming year, well away from the prior baseline of an extended hold. A chair who dislikes forward guidance managed to move the rate path a good deal further with one speech than most of his predecessors managed with a statement.

It is worth noting that experts can read that same breadth differently. Much of it could very well reflect temporary supply shocks working through goods prices, tariff inflation continues to fade and AI-related inflation should look smaller once the September methodology changes land, which leaves energy passthrough as the genuine wild card; in services, where the persistent inflation actually lives, breadth is normalizing more quickly as productivity gains meet slowing wage growth. The two views also part company on jobs. Warsh played down the other half of the mandate, treating softer payroll growth as a labor supply story and lower openings and quits as evidence of better matching after the pandemic, a reading more sanguine than the view that labor demand remains fragile.

What the speech left out matters nearly as much as what it contained. There was no mention of balance sheet policy, despite hints in the July minutes that the committee is preparing to take it up, and none of Treasury Secretary Scott Bessent’s move to buy back more longer-dated debt, which could work at cross purposes with monetary policy. Forward guidance stays buried and a chair who speaks less often raises the odds that markets overreact to any single word he does use, which may be the point. Financial conditions have tightened over the past few months without a single change in the policy rate, giving the hawks the restraint they want while preserving the flexibility the doves prefer. It is the monetary policy equivalent of a conductor lowering the baton and letting the orchestra play louder on its own.

The plumbing beneath the speech moved as well. The July minutes showed participants expecting inflation to step down over coming months while waiting for more clarity, and policymakers have been weighing a cut in regular meetings from eight a year to six starting next year. On the Treasury side, the at-least doubling of the cap on buybacks of longer-dated securities signals discomfort with the recent rise in yields, though the sums stay small: lifting the cap to $4 billion from $2 billion implies roughly $28 billion of purchases between September and November against a prior cap of $14 billion, a fraction of what the Fed bought in any round of quantitative easing, and the Treasury must borrow elsewhere to pay for it. Oxford Economics does not expect such measures to offset rising corporate issuance, persistent federal deficits and the threat of further supply-shock inflation, all of which push long yields the other way. One threat did come off the board: the administration postponed the 50% Section 338 tariffs on Canada shortly before their August 19 start date, sparing an increase in the effective rate on Canadian goods to 6.9% from 5.1% and a two-tenths addition to the overall effective rate.

• Key Takeaway: Warsh moved the rate path without moving the rate, and markets now price two hikes. That gap is the single most important variable heading into September, and it is projected to close on the inflation data rather than on anything further the chair chooses to say.

The Labor Market: A Smaller Number, the Same Story
The annual benchmark revision arrived, and for once it did not detonate. The Bureau of Labor Statistics (BLS) put its preliminary revision to March nonfarm payrolls at negative 79,000, which would lower average monthly job growth in the twelve months through March to 16,000 from 23,000. Set that beside the final revisions of negative 861,000 for 2025 and negative 598,000 for 2024 and the number looks almost polite. The estimate rests on the Quarterly Census of Employment and Wages (QCEW), a fuller count drawn from unemployment insurance records, and it came as a mild surprise, since the QCEW data through December had pointed the other way.

The private sector cut ran deeper at 178,000, though that amounts to roughly 0.1% of employment against a 0.2% average absolute revision over the past decade, and it implies average monthly private job growth of 27,000 in the year to March. Two caveats keep this from meaning much. The revisions look backward, and the preliminary figure is rarely the last word: in nine of the past ten years the final revision has landed more positive than the preliminary estimate, by an average of 71,000. Information, transportation and utilities saw the largest upward adjustments, while wholesale trade, mining and retail took the largest cuts and federal employment fell sharply over the benchmark period on layoffs and resignations.

The weekly data kept describing a market that hires reluctantly and fires almost never. Initial claims fell 6,000 to 206,000 in the week ended August 15, with no visible lift from the wildfires in the Northwest, then eased again to 203,000 the following week, running 11.2% below year-ago levels on an unadjusted basis. Continued claims kept up their usual see-saw, rising to 1.799 million in the week ended August 1 with the four-week average steady at 1.790 million and 8% below the prior year, then falling 18,000 to 1.778 million in the week ended August 15. Demand for workers stays soft, but the supply of workers has softened faster, which is why the balance holds.

Households noticed. The Conference Board differential between those calling jobs plentiful and those calling them hard to get jumped 4.8 points to 7.5%, a reading that taken on its own would imply an unemployment rate near 4.8%, though Oxford Economics looks instead for a rate holding near 4.2% as slower labor force growth and reduced net immigration keep the arithmetic in balance. The gap between what the differential implies and what the forecast says is a reminder that perception surveys measure mood as much as they measure hiring.

• Key Takeaway: A benchmark revision of 79,000 changes the labor market story by almost nothing, and history suggests the final number will come in friendlier still. Claims near 200,000, continued claims below year-ago levels, and improving perceptions all point to the same balanced market that has let the Fed keep its attention on prices.

The Consumer: Steady Wallet, Sour Mood
The second reading on second-quarter growth left the headline alone and improved the contents. Real GDP still grew 1.5% annualized, but an upward revision to consumer spending offset a downward revision to net exports, and corporate profit margins advanced to a record high, which bodes well for business investment ahead. Real consumer spending then came in flat in July, with the weakness concentrated in goods, particularly recreational goods, motor vehicles and parts, and apparel, while services carried the month on recreation and transportation, two categories that respond keenly to household wealth.

The tracking numbers hold up better than the July print suggests. The Oxford Economics nowcast for third-quarter consumption points to a 2% annualized gain, an improvement on the estimate that followed the weak retail sales report, helped by favorable revisions to prior months and by personal income rising more than anticipated on dividends, government social benefits and above all private wages and salaries. The price side is where the comfort runs out. Both headline and core PCE indexes came in a touch firmer for the second quarter. Headline PCE inflation is likely to hover above 3% through the second half on the energy shock and the AI buildout.

The mood, meanwhile, curdled. The University of Michigan sentiment index fell to 51.7 in August from 55.2, reversing much of July’s improvement, and the decline reached across the political spectrum, with sentiment among Republican respondents off more than 7% to its lowest level for that group since the 2024 election. The Conference Board told a similar story from a different angle, slipping to 89.4 from a downwardly revised 90.2 as expectations for income, business conditions and the labor market six months out sank to their weakest since January. Inflation expectations gave a mixed reading. The Conference Board year-ahead measure rose two tenths to 5.8% in line with renewed pressure at the pump, while the Michigan short-run measure eased three tenths to a still-high 4.0% against 3.4% before the war began, with the long-run figure steady at 3.3%.

Underneath the averages, the split that has defined this year grew sharper again. Sentiment fell among low- and middle-income consumers and rose among high-income respondents, since elevated gasoline prices fall hardest on households that spend the largest share of income on essentials, while strength in equity markets keeps lifting the top end through the wealth effect. The personal saving rate has slipped below 3%, down from an average of 4.6% in 2025, and rebuilding that cushion will hold back spending at the lower end even as energy prices eventually ease. The link between how consumers feel and what they spend has frayed considerably in recent years, which is fortunate, because the feelings look worse than the receipts.

• Key Takeaway: Spending is holding up better than sentiment, margins hit a record and income growth keeps doing the quiet work. The catch is that core inflation is now projected to end the year above 3%, which may hand the hawks their argument and leave the lower-income consumer absorbing the difference.

Industry and Trade: The Buildout Spreads, and So Does the Bill
Factories kept broadening out. Industrial production rose 0.2% in July, a shade under expectations, though a revision lifted June to 0.3% from an initially published 0.1%. AI-linked industries still supply the horsepower, with computer and electronic products posting another solid gain, and the spillovers now reach electrical equipment, machinery and metals, all of which advanced in July. Federal money is lifting defense and space equipment, including drones, missiles and satellites, while aerospace lurched ahead as regulators cleared Boeing to hit new production milestones after years of setbacks. Factory output would have looked stronger still without a drop in motor vehicle production, which typically plunges in July on summer retooling. The baseline still calls for industrial production to grow 1.3% this year, with a turn in the inventory cycle spreading the gains beyond the AI-linked industries.

Orders told the same story with a softer voice. Headline durable goods orders rose 1.1% in July, ex-transportation orders gained 0.4% and nondefense capital goods orders excluding aircraft, the cleanest read on capital spending intentions, managed only 0.2% against a forecast of 0.5%, though a revision took the June figure up to 1.7% from 1.2%. Orders for computers and electronic products slipped 1.1% after a strong June and still stand 14.8% above a year ago, with machinery and metals both growing at double-digit annual rates. The August baseline assumes business equipment spending grows 6.8% annualized in the third quarter, a sharp step down from 15.2% in the second but a solid pace all the same.

The same buildout that flatters the factory data punishes the trade data. The advance goods deficit widened $17.4 billion to $118.8 billion in July, the largest since the first quarter of 2025, as imports climbed 3.7% while exports fell 2.9%. The entire import gain traced to an 11.3% jump in capital goods, essentially computers, computer accessories and semiconductors, while every other import category fell 1.6%. On the export side, industrial supplies fell $9.0 billion on weaker petroleum shipments, though oil exports perked back up in August. Net trade looks set to subtract more than a percentage point from third-quarter growth, with the risks tilted toward a larger drag. The pattern has become familiar enough to name: the country buys the hardware abroad, books the spending at home and watches the two largely cancel in the growth arithmetic.

Import prices offered the clearest piece of relief. They fell 0.4% in July, with a 7.2% drop in fuel prices accounting for the entire decline, while nonfuel prices rose 0.4%, a slowdown from the 0.6% average monthly gains of the first half, leaving the annual increase at an elevated 5.9%. Oxford Economics looks for global oil to bounce around $80 a barrel until a durable peace between the United States and Iran takes hold. The wildcard sits where it always sits now, in computers and electronic accessories, whose prices have climbed an average of 2.1% a month through July.

• Key Takeaway: Manufacturing is no longer a one-industry story, with defense, aerospace, machinery and metals joining the AI complex, and profit margins at a record support the case that capital spending has further to run. The bill arrives in the trade account, where a widening deficit will keep subtracting from measured growth.

Housing: Still in the Rut
Housing is demonstrating what higher-for-longer actually costs. Starts fell 12.4% in July to a seasonally adjusted annual rate (SAAR) of 1.239 million, well under the 1.325 million estimate and the 1.345 million consensus, with single-family starts down 9.9% and multifamily down 16.8% after a 77% spike in June. Permits, the steadier guide, went the other way, rising 5% to 1.443 million against expectations of 1.375 million, with single-family permits up 2.5% to their best level since March. Even so, the residential investment tracker now points to a 2% annualized decline this quarter against the 0.1% dip in the baseline.

Builders remain unimpressed. The National Association of Home Builders (NAHB) index ticked up a point to 35 in August, above the 33 consensus but still the sixteenth consecutive month below 40, the longest such streak since the 2011-2012 foreclosure crisis, and keeping the pressure on is mortgage rates at their highest since last August. The obstacle is the overhang: the supply of unsold completed homes has come off its highs from earlier this year but still sits near levels last seen in mid-2009. Builders keep buying their way out of it, with the share offering price cuts easing to 35% in August from 37% in July while incentives eat into margins.

Sales data pointed the same direction. Pending home sales fell 2.3% in July, worse than the 1% decline forecast and the flat consensus, alongside a 6.5% drop in mortgage purchase applications and mortgage rates at their highest since August 2025. Because contracts lead closings by roughly thirty days, that points to another dip in existing home sales in August, with the forecast holding existing sales just above 4 million through the rest of the year. New home sales fell 10.5% to 607,000, though a hefty upward revision took June to 678,000 from 628,000, which suggests July overstates the weakness; mortgage rates stood at 6.65% as of August 20, and the supply of new homes at 488,000 works out to 9.6 months at the July selling pace. The median new home price fell 2.3% to $393,800, keeping the annual change negative, as homes above $600,000 slipped to 19.7% of sales on a trend basis, their smallest share since September 2021.

Prices, for all that, refuse to break. The S&P Cotality Case-Shiller national index rose 0.1% in June and 1.5% over the year, with annual changes across the twenty-city index running from a 1.9% decline in Seattle to a 6.9% gain in Chicago. The Federal Housing Finance Agency (FHFA) index was flat on the month and up 2.3% over the year, easing from 2.4% in May, with all nine Census divisions positive, from 0.4% in the Pacific to 4.9% in the East North Central. A market where almost nobody wants to buy and almost nobody has to sell does not crash. It simply stops moving.

• Key Takeaway: Starts fell hard, permits rose and the truth sits between them: construction moving sideways while builders work off inventory near 2009 levels. Prices hold up because supply stays lean, which makes housing the clearest illustration of what a Fed on hold at these rates costs the real economy.

Final Thoughts
Two weeks that looked quiet on the calendar delivered the most consequential Fed communication of the year. Warsh told Jackson Hole that 2% remains a firm, fixed target, that policy is not restrictive, and that inflation is easing too slowly, and the market answered by moving September to a coin toss and pricing two hikes over the coming year. Underneath the speech the economy behaved much as it has all summer. The benchmark revision took 79,000 jobs off the March level and changed nothing that matters, claims stayed near 200,000, spending held up while sentiment sagged and manufacturing kept broadening beyond the AI complex.

The complication is the one the chair named. Core inflation is forecasted to end the year above 3% rather than drifting quietly toward target. Housing is paying the price of rates that have not come down, and the lower-income consumer is absorbing a gasoline bill the wealthier half barely notices. A chair who tightens by talking has bought himself time, and the coming round of jobs and inflation data will show why he bought it. For now, the economy keeps doing what it has managed all year, growing through the noise while the argument over rates carries on above it.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2608-32

A week away from the desk can mean returning to a story that has moved on without you. This time the story mostly stood still, which is its own kind of news: payrolls fell and nobody panicked, inflation cooled and nobody celebrated and a Federal Reserve that spent late July arguing with itself settled into a pause that now stretches past the horizon. The economy keeps growing without hiring many people, and for the moment that arrangement suits nearly everyone.

Executive Summary

• Nonfarm payrolls fell 23,000 in July against a forecast gain of 80,000, though a 50,000 drop in state and local government employment accounted for the entire decline and private payrolls still rose 30,000. Oxford Economics now puts breakeven employment growth, the monthly pace required to hold unemployment steady, near 20,000 in the second half of the year, a bar low enough that a negative payroll print says very little about the direction of the economy.
• Headline Consumer Price Index (CPI) inflation inched up 0.1% in July while core CPI rose 0.2%, leaving core inflation at 2.5% year over year. The Producer Price Index (PPI) came in flat at the headline level, easing annual producer inflation to 4.7%, though core services prices rose 0.6% on a 6.5% jump in portfolio management fees.
• Retail sales dropped 0.6% in July, with the control group down a lesser 0.4%, trimming the third-quarter consumption estimate to a 1.7% annualized pace from 2.2%. The Institute for Supply Management (ISM) manufacturing index jumped 2.3 points to 55.6, its highest reading since May 2022, and its employment index climbed into expansion for the first time since August 2023.
• Treasury ran a $432 billion deficit in July against $291 billion a year earlier, and Oxford Economics looks for a $1.9 trillion shortfall in fiscal 2026 followed by $2.1 trillion in fiscal 2027.
• Traders have walked back their rate-hike bets, pushing the first expected cut out to January after pricing a full cut by October at the start of the month.

The Fed: A Family Fight, Then a Long Silence

The Federal Open Market Committee (FOMC) met on July 29 and did what it has done all year, which is nothing. Three officials dissented in favor of a rate hike, and Chair Kevin Warsh, whose distaste for forward guidance has become the defining feature of his tenure, described the gathering afterward as a good family fight and left the rest to the imagination. He also floated the notion of the committee meeting fewer than eight times a year, which would give him even fewer occasions to say very little. The minutes arrive on August 19. In an era of deliberate vagueness from the podium, a set of minutes carries more weight than it used to.

The two weeks of data that followed handed the committee every reason to keep sitting still. Benign July readings on consumer and producer prices seem to indicate that inflation has already crested, with core Personal Consumption Expenditures (PCE) inflation drifting down toward 2.3% by the end of 2027. That path does not ask the Fed for heroics. It asks for patience, which is the one commodity this chair appears willing to supply in quantity. Geopolitics has begun to cooperate as well, since talks among the United States, Iran and Oman toward reopening the Strait of Hormuz have made enough progress to support that view, though it remains far too early to call the peace a lasting one.

Markets have come around to the same point of view. At the start of August, futures carried roughly a full rate cut by the October meeting; by the middle of the month, traders had pushed the first cut all the way out to January. Trade policy supplies the one live wire on the calendar. The 50% Section 338 tariffs on Canada take effect August 19 absent an off-ramp, and they would lift the effective tariff rate on Canadian goods to 6.9% from 5.1%. The effect on the overall effective rate comes to two tenths of a percentage point, closer to a rounding error than a regime change.

• Key Takeaway: The July meeting produced a hold, three dissents and a chair who prefers silence to guidance, which leaves the August 19 minutes as the closest thing to a policy signal on the calendar. Nothing in the past two weeks argues for moving rates in either direction before the leaves turn.

The Labor Market: An Expansion That Forgot to Hire

The July employment report looked alarming for roughly ninety seconds. Nonfarm payrolls fell 23,000, well short of the 80,000 gain forecasters had penciled in, and revisions took May and June down by 66,000 and 37,000 respectively, pulling the three-month average of job growth to 20,000. A 50,000 plunge in state and local government employment, most of it in education and most of that a quirk of when school years end, accounted for the whole of the headline decline, while private payrolls managed a 30,000 gain. That government drop is likely to reverse in August or September.

The number only alarms until it meets its denominator. Slower immigration and an aging population have dragged the breakeven pace of hiring, meaning the monthly job growth required to hold the unemployment rate flat, down to roughly 50,000 for the year as a whole and about 34,000 in the second half. Weaker participation has since taken that second-half estimate closer to 20,000, low enough that a monthly print is about as likely to come in negative as positive on statistical noise alone. Judging this labor market against a fixed yardstick is like weighing yourself on a scale that quietly recalibrates each morning: the number moves, and so does the standard. The unemployment rate obliged by falling to 4.1% from 4.2%, though for uncomfortable reasons, since household employment declined and the labor force declined by more, with participation slipping to 61.4% from 61.5%.

Nearly everything else pointed to calm. Initial jobless claims came in at 199,000 in the week ended August 1, dragging the four-week average below 200,000 for the first time since October 2022, then drifted back to 209,000 the following week without changing the message. Continued claims fell to 1.777 million, roughly 8% below year-ago levels. Job openings fell 178,000 in June, with the hire rate and the separations rate each ticking up a tenth and leaving net employment unchanged. Private payrolls in the Automatic Data Processing (ADP) report rose 44,000. Small businesses, for their part, sounded downright cheerful, as the National Federation of Independent Business (NFIB) optimism index rose 2.4 points to 99.8 and moved above its long-run average of 98.0. Hiring intentions there surged 9 points to 20%, the strongest reading in nearly four years.

Wages are where all of this matters for policy. Average hourly earnings edged up 0.1% in July, taking annual growth to 3.2%, the softest pace since May 2021. Productivity rose 1.7% in the second quarter, and a revision lifted the prior quarter to 0.8% from 0.3%. Unit labor costs climbed just 1.3% in the quarter for an annual pace of 1.4%. Labor is not the source of the inflation problem, and the committee knows it. One wrinkle sits ahead: the administration ended Temporary Protected Status (TPS) for roughly 330,000 Haitians at the end of July, of whom an estimated 200,000 held jobs, a subtraction that will land in both employment and the labor force on a date nobody can pin down.

• Key Takeaway: A negative payroll print in a month when the economy needed only about 20,000 jobs to stand still is a headline, not a warning. Wage growth below 3% set against productivity above 2% is precisely the mix that lets a hawkish committee stay put, and July delivered it.

Inflation: Benign in July, Bumpier in August

July inflation arrived quiet enough to be boring, which is exactly what the committee wanted. Headline CPI inched up 0.1% as gasoline kept dragging on the index, though gasoline gives that relief back in August, and the deceleration in food prices may prove a head fake, since fertilizer shortages during the spring planting season should push grocery prices higher into next year. The more consequential figure was the 0.2% rise in core CPI, which keeps the core running at 2.5% year over year.

The core detail is where the reassurance lives. Tariff passthrough has largely run its course, with apparel, one of the last categories to absorb it, up only slightly and vehicle prices rising in line with expectations. Rent measures sit just below their pre-pandemic averages and should stay there in a jobless expansion. The exception is the machine humming in the corner of the room. The CPI for computers, peripherals and smart home assistants jumped on price increases from Apple, while software and accessories rose only modestly, a distinction that matters because those categories carry more weight in the PCE index. So-called supercore prices, meaning services outside energy and housing, did pick up on a rebound in medical care and another firm month for airfares.

Producer prices told a similar story with a similar caveat. The July PPI came in flat at the headline level while core prices rose 0.2%, easing annual producer inflation to 4.7% and the core to 4.2%, both the lowest since March. Energy did the work once again, falling 3.1% in the month, although retail gasoline and diesel climbed 20 to 30 cents a gallon between the two survey windows, so August will read considerably worse. Cheaper fuel fed through to transportation and warehousing, down 1.8%, and to food, which fell 0.9% to reach negative 0.1% year over year.

The upward pressure sat in core services, which rose 0.6% on a 6.5% jump in portfolio management fees, a category billed as a percentage of portfolio value and therefore a lagged echo of equity markets rather than a sign of economic heat. With CPI and PPI both in hand, the PCE nowcast points to a 0.15% rise in headline prices and 0.24% in the core, enough to nudge annual headline PCE inflation down to 3.6% from 3.7% while the core holds at 3.3%.

One structural shift deserves attention, because it will color the argument inside the Fed for the rest of the year. Core CPI has historically run above core PCE, largely because shelter accounts for roughly 34% of the CPI basket against about 16% of the PCE basket. As shelter inflation normalizes, that boost fades, while rising prices for memory, gaming hardware and computer components driven by the artificial intelligence (AI) buildout push the PCE index up relative to the CPI. The two gauges are thermometers hung on opposite walls of the same room, and they are about to start disagreeing in public. Chair Warsh has played down the chip price spike as something other than broad inflationary pressure, a view the data will test every month the buildout keeps buying hardware.

• Key Takeaway: July inflation cooled on both sides of the ledger with no sign of broadening beneath the surface, which is the specific result the Fed needed to justify staying on hold. August will look less flattering as gasoline reverses, so read the calm as a data point rather than a trend.

The Consumer and Housing: Momentum Leaks Out

The consumer picked an inconvenient fortnight to lose a step. Retail sales dropped 0.6% in July, far worse than anyone looked for, though the details soften the blow considerably: nonstore sales did most of the damage as payback after promotional events juiced online spending the month before, lower pump prices pulled down nominal spending at gas stations, and the decline in auto sales does not feed the Bureau of Economic Analysis (BEA) calculation of personal consumption. The control group, the piece that actually reaches the national accounts, fell a lesser 0.4%.

The arithmetic still lands somewhere less comfortable. Third-quarter consumer spending now tracks a 1.7% annualized gain against a prior forecast of 2.2%, and unfavorable revisions cut the second-quarter figure to 2.9% from an advance estimate of 3.2%. Writing off the household sector on that basis would be premature, since the job market remains broadly balanced and financial wealth keeps climbing for the households that own the assets.

Credit told a two-handed story. Consumer credit rebounded $14.2 billion in June, with revolving growth accelerating to 3.8% year over year and non-revolving growth reaching 2.0%. Student loans fell $1.7 billion for a second consecutive monthly decline, slowing annual growth to 3.6% from 3.9%, and the borrowing caps and stricter repayment rules under the One Big Beautiful Bill Act (OBBBA) take effect this quarter. Vehicle sales eased to a 16.3 million annualized pace in July from 16.5 million, with the mix tilting toward hybrids, whose share of sales peaked at 17.4% in May against 13.9% in February. Fully electric and plug-in hybrid vehicles accounted for 7.7% of June sales after averaging above 9% in 2025, a casualty of the expired electric vehicle (EV) tax credit.

The divide keeps widening in plain sight. The top 20% of earners now account for more than half of new-vehicle purchases, and the preliminary August reading on consumer sentiment came in surprisingly weak, with the decline concentrated among low-income households. Same economy, two entirely different vantage points and nothing in these two weeks suggests the two groups are about to trade places.

Housing stayed stuck in the same room it has occupied all year. Existing home sales fell 1.7% in July to a seasonally adjusted annual rate (SAAR) of 4.06 million, with June revised up 40,000 to 4.13 million. Sales stood 0.7% above year-ago levels. Inventory contracted as the spring selling season closed, leaving 4.6 months of supply, and the median price fell 2% in the month to $434,100 while holding a 2% annual gain, with regional divergence narrowing as price growth in the West edged into positive territory. Residential investment looks likely to slip a little this quarter after a 1.5% annualized gain in the second, though home improvement remains one of the few bright spots, as the rise in spending on building materials showed.

• Key Takeaway: The July retail miss looks worse on the surface than underneath, but the household sector clearly enters the second half with less momentum than the spring suggested. Wealth carries the top quintile, gasoline squeezes the bottom and housing waits on mortgage rates that show no inclination to cooperate.

Industry, Trade and the Ledger

Factories are having the year the rest of the economy is not. The ISM manufacturing index jumped 2.3 points to 55.6 in July, its best reading since May 2022, with new orders at 56.7, the backlog of orders up 4.5 points to 55 and production at 58.5, a five-year high. Defense and semiconductor-related machinery remain the standouts, though firms now compete over a limited pool of inputs and lead times keep stretching. Most encouraging of all, the employment index rose 3.1 points to 52.8, its first month of expansion since August 2023, with panelists describing a ratio of hiring to headcount cuts of 1.5 to 1.

Services held their ground without adding jobs. The ISM services index edged up to 54.1 from 54.0, and the weighted average of the two surveys points to gross domestic product (GDP) growth just above 2% annualized at the start of the third quarter. New orders and business activity carried the index while employment dragged on it. This a mostly jobless expansion, the product of slow labor force growth and strong productivity. That phrase deserves to stick, because it explains why a weak payroll number and a strong factory survey can describe the same economy without contradiction.

The financing side became friendlier. In the July Senior Loan Officer Opinion Survey (SLOOS), banks left commercial and industrial (C&I) lending standards unchanged for large and medium-sized firms for the first time since the fourth quarter of 2024, even as a modest net share kept tightening terms for small firms. That matters because investment outside AI posted its largest quarterly gain in three years during the second quarter, which suggests the capital spending story is broadening beyond data centers. Construction spending fell 0.1% in June, but upward revisions to earlier months point to business structures’ investment declining only 3% annualized rather than the 5% first published.

Trade offered a rare piece of good news alongside one caution. The deficit narrowed to $73.3 billion in June from $77.6 billion in May, though the strength of imports earlier in the quarter still left net trade as a full percentage point drag on second-quarter GDP. Capital goods imports fell $2.1 billion, the first monthly decline since September 2025, and they still sit 37% above year-ago levels. Crude and fuel oil exports dropped a combined $7.3 billion as volumes returned toward 11 million barrels a day from a late-April peak above 14 million, which closes out the export windfall that disruption in the Strait of Hormuz handed the United States earlier this year.

The fiscal ledger, meanwhile, keeps deteriorating quietly. Treasury reported a July deficit of $432 billion against $291 billion a year earlier, although a calendar quirk pushed roughly $98 billion of benefit payments into the month. Fiscal year to date the shortfall stands at $1.799 trillion, or $1.701 trillion after adjusting for that distortion, against $1.629 trillion at the same point last year. Receipts grew 3.2%, with corporate collections down 23% under the OBBBA tax cuts and customs duties flipping from tailwind to headwind as roughly $105 billion of an anticipated $160 billion in tariff refunds went out the door. The August forecast update trimmed 2026 GDP growth by a tenth to 2.2% while keeping 2027 at 2.7%.

• Key Takeaway: Manufacturing has quietly become the strongest cyclical story in the economy, and the end of tighter C&I standards suggests the capital spending revival is spreading past the data centers. The bill for tax cuts and tariff refunds keeps accumulating in the background, which is tomorrow’s problem right up until it is not.

Final Thoughts

Two weeks of data produced one durable idea: this is an expansion that has largely stopped hiring and has not much missed it. Payrolls fell and the unemployment rate fell with them, wage growth slid below 3% while productivity ran above 2%, factories posted their best survey in four years, and inflation cooled on both the consumer and producer sides without broadening underneath. A committee that spent late July in a family fight now has every excuse to keep quiet through September, and markets have stopped arguing. The August 19 minutes will reveal how close that fight came to a hike, and the next round of price data will show whether July’s calm survives contact with a reversal in gasoline. For now, the economy grows on productivity rather than payrolls, which works well enough as long as nobody looks too closely at who is getting hired.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2608-15

Last week’s letter left an open question hanging in the air: Would the labor market’s slow warming ever reach the people standing inside it? This week supplied a partial answer, plus a new face at the podium, as Federal Reserve Chair Kevin Warsh is scheduled to deliver his first congressional testimony while the data beneath him tells an increasingly split story. Assets are earning their keep and debts are behaving, while everyone else waits for the thaw to arrive.

Executive Summary

• Federal Reserve Chair Kevin Warsh testifies before Congress this week for the first time since his confirmation. Given his preference to eschew forward guidance, it is unlikely that his appearance will change forecasters’ outlooks for monetary policy.
• The Institute for Supply Management (ISM) nonmanufacturing index slipped 0.5 point to 54.0 in June, while its prices index fell 3.6 points to 67.7, the lowest reading since the start of the US/Israel-Iran War.
• The May trade deficit widened to $77.6 billion from $54.6 billion, pointing to a net trade drag north of 2 percentage points on second quarter gross domestic product (GDP), well above the 1.3 percentage point drag built into the prior baseline.
• Consumer credit slipped $0.2 billion in May, its first decline since June 2025, as a $5.3 billion drop in revolving credit outweighed a $5.1 billion rise in nonrevolving credit.
• Existing home sales fell 2.4% in June to a seasonally adjusted annual rate (SAAR) of 4.09 million, yet sales of homes priced at $1 million or more rose 18% year over year while the lowest price tiers stayed flat or fell.
• Initial jobless claims eased 2,000 to 215,000 in the week ended July 4, and Oxford Economics raised its 2026 GDP growth forecast by 0.2 percentage point to 2.3% while trimming its headline inflation forecast by 0.4 percentage point to 3.2%.

The Fed: Warsh Steps to the Podium

On Tuesday and Wednesday of this week, Federal Reserve Chair Kevin Warsh appears before Congress for the first time since his confirmation, delivering the semiannual testimony required by law. We doubt his appearance will alter the outlook for monetary policy. The FOMC carries a hawkish bias because of elevated inflation, yet it is in no rush to raise rates. Unless there is a meaningful change in the data or economic situation, the expectation remains that the committee holds steady while inflation gradually declines, with the next policy change arriving as a rate cut most likely in 2027.

Twice each year, the Fed must submit a policy report to Congress “containing a discussion of the conduct of monetary policy and economic developments and prospects for the future, taking into account past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices.”

It was interesting to see whether the report was going to shrink the way the FOMC policy statement did, or the way the FOMC minutes did, which ran roughly 20% shorter than those from former Chair Jerome Powell’s last meetings. Instead, Warsh set a record for the length of a first monetary policy report from a Fed chair, at least by page count, even though his word count came in lower. It is the equivalent of a playwright trimming every line of dialogue while doubling the stage directions: less said, more pages spent describing how it should be said. Not surprisingly, the report, released the prior Friday, details five task forces Warsh has created to examine the Fed’s approach to conducting monetary policy, a subject he will likely revisit in his prepared testimony as well.

Geopolitics added a wrinkle without forcing a rewrite. The resumption of military strikes between the United States and Iran lends upside risk to the forecast for oil prices and inflation, a risk that would grow if hostilities persisted.

The broader July forecast update raised 2026 GDP growth by 0.2 percentage point to 2.3% and cut headline inflation by 0.4 percentage point to 3.2%, reflecting a milder hit to real incomes from oil than previously assumed. The offset sits in the core: core inflation now looks likely to stay above the Fed’s 2% target six months longer than earlier expected, as artificial intelligence (AI) related demand keeps electronics prices elevated. The June FOMC minutes reinforced the same tension, confirming inflation as the dominant concern with a few officials saying they could have backed a rate hike in June, though the minutes did not change the baseline of an extended pause, and a range of Taylor type policy rules still points toward a cut eventually, even as the hawkish shift leaves little tolerance for any upside surprise in inflation.

• Key Takeaway: Warsh’s first turn before Congress is unlikely to move markets or the forecast on its own, and the more informative signal keeps coming from beneath him: a committee content to wait, a rate cut path anchored to a date further out in the future and a round of Iran-related risk that muddies the water but is not yet changing forecasts.

The Labor Market: A Quiet Summer

Initial jobless claims eased 2,000 to 215,000 in the week ended July 4, a touch lower than expected but consistent with the low, stable layoff rate that has defined recent months. A revision took the prior week up 2,000 to 217,000, and the four-week moving average fell 3,750 to 218,750, moving further away from the elevated June readings helping reinforce the argument that the earlier rise in claims reflected seasonal noise rather than any genuine deterioration in labor market conditions.

On an unadjusted basis, claims rose 9,967, which was modestly less than the 11,478 increase seasonal factors had anticipated. Summer auto plant shutdowns typically show up in the unadjusted data at this point in the calendar, yet states with high auto employment have trended well below prior years so far in July.

In the week ended June 27, continued claims rose 8,000 to 1.814 million, after a downward revision of 8,000 to the prior week. The four-week average has tilted slightly higher since May, but with initial claims falling and payroll growth improving, continued claims are more likely to move lower in the weeks ahead.

The manufacturing side of the labor market offered a small corroborating signal. The ISM nonmanufacturing employment index expanded for the first time in four months, helped in part by hiring tied to the World Cup, though the move looks like stabilization rather than a genuine reacceleration, which bolsters the argument for the Fed to stay on an extended pause as it focuses on the inflation side of its dual mandate. Oxford Economics’ own labor market tracker tells a similar story, consistent with a job market roughly in balance but showing more signs of softness than overheating, with the hiring rate still the weakest metric even as it has stabilized off its recent low. Picture a swimming pool with the drain and the tap both open at close to the same rate: the water level barely moves, even though plenty is happening just beneath the surface.

• Key Takeaway: The labor market is settling into a quiet summer rhythm, neither heating up nor cooling down in any convincing way, an equilibrium built as much on a shrinking pool of available workers as on employer demand, and that quiet is precisely the condition under which a patient Federal Reserve prefers to sit still.

Services and Prices: Cooling on a Second Front

The ISM nonmanufacturing index ticked down 0.5 point to 54.0 in June, though every one of its four components still registered expansion. Business activity and new orders slipped slightly but stayed above their twelve-month averages, evidence that the services side of the economy remains resilient. The supplier deliveries index ticked lower too, still pointing to some lingering supply chain stress that the onset of peak shipping season could aggravate in coming months.

The more interesting number sat in prices. The prices paid index fell 3.6 points to 67.7, its lowest reading since the US/Israel-Iran War began, as some respondents reported the benefit of lower energy costs. The reading lines up with the view that inflation likely peaked in May, aided by the retreat in oil prices tied to the de-escalation in the Middle East, although headline inflation should stay well above the Federal Reserve’s 2% target for the rest of the year.

The relief is unlikely to spread evenly. Brent crude may very well average in the low $70 per barrel range in the second half of the year assuming no re-escalation of the conflict in Iran. At the same time, respondents in food services and agriculture both reported higher input costs in June and expect the impact to peak in the third quarter, consistent with the forecast for food inflation to accelerate in the second half of 2026 on the back of earlier fertilizer price spikes.

The same pattern showed up on the consumer side of the ledger. Falling motor fuel prices should produce a headline consumer price index (CPI) decline in June, which would push real average hourly earnings up month over month. However, this pace of real earnings growth is unlikely to become the norm, since it partly reflects a fading income tax refund windfall that had offset the earlier energy price shock. Headline producer prices should see a far more muted rise in June for the same reason, though ongoing strength in core goods prices and a bounce in trade prices should still deliver a solid increase in core producer price index (PPI).

• Key Takeaway: The service sector’s price gauge has joined its manufacturing counterpart in pointing toward a peak, yet the descent looks unlikely to run smoothly, with food costs and core goods prices still pulling in the opposite direction.

Trade and the AI Ledger

The May trade deficit surged to $77.6 billion from $54.6 billion, as a 3.3% jump in imports outran a 3.2% decline in exports. The data point to a net trade drag north of 2 percentage points on second quarter GDP, larger than the 1.3 percentage point drag previously built into the baseline. Strong business investment and an offsetting boost from inventory accumulation should still keep GDP growth above 2% for the quarter.

The decline in exports traced mostly to industrial supplies, where a $6.2 billion fall in non-monetary gold exports did most of the damage. Despite the trend in non-monetary gold, industrial supplies exports actually rose 1%, bolstered by crude oil exports that surged after the closure of the Strait of Hormuz. The partial reopening of the Strait, following a memorandum of understanding (MOU) between the United States and Iran, has since pushed petroleum exports back toward pre-war levels, a shift that could widen the trade deficit further in June.

The rise in imports was broad based. Up $3.5 billion, consumer goods led the increase, with about half of that strength tied to pharmaceutical preparations, possibly a sign that businesses are frontloading pharmaceutical imports ahead of the 100% tariffs scheduled to take effect on July 31, though the policy carries many exemptions. Industrial supplies exports rose $3.1 billion and autos increased $2.2 billion, likely reflecting efforts to restock inventories that remain lean relative to sales.

Capital goods imports, including computers, computer accessories and semiconductors, rose $1.1 billion in May, even as exports of the same goods shrank $3.5 billion. Over the past year, capital goods imports have climbed 42%, compared with growth of just 2% for all other imports, a gap that keeps widening on the back of ongoing demand for AI hardware. Because the United States relies so heavily on electronics equipment sourced from abroad, the AI buildout has contributed next to nothing to GDP on a net basis so far, even as it adds roughly 0.35 percentage point to 2026 GDP growth through the investment channel alone, and any real cooling in AI optimism remains a genuine downside risk, both through weaker investment and a negative wealth effect. Think of the AI buildout as a delivery truck that unloads its cargo at the border and drives back out empty: the spending happens, but a large share of it never really enters the country’s own output.

• Key Takeaway: The AI buildout keeps widening the trade gap even as it keeps the domestic investment engine humming, a reminder that a chip imported from overseas registers as a drag on trade well before it shows up as a lift to growth, if it ever fully does.

The Consumer and Housing: A Two-Tier Economy

Consumer credit was essentially flat in May, slipping $0.2 billion, the first decline in outstanding credit since June 2025. A $5.3 billion drop in revolving credit slightly outweighed a $5.1 billion rise in nonrevolving credit. Revolving credit growth slowed to 3.4% year-over-year from 3.9% in April, while nonrevolving credit growth decelerated to 1.6% from 1.8%.

Revolving credit has absorbed the brunt of slower spending growth. Even as gasoline prices retreat, this year’s energy shock already squeezed real household incomes, pushing consumers to draw down savings or tap accumulated wealth to sustain spending rather than reach for a credit card. That dynamic should keep a ceiling on revolving credit as households prioritize rebuilding savings.

Delinquency data hint at why. The share of credit card balances more than 90 days past due has risen sharply over the past two years, even though the rate of transition into delinquency has stayed fairly stable since 2024, a pattern that looks less like a sudden wave of new financial stress and more like evidence that households already struggling are finding it harder to climb back out.

Nonrevolving credit, dominated by student and auto loans, showed the same split. Student loans fell $2.3 billion on a nonseasonally adjusted basis, with growth slowing to 3.9% year over year from 4.2% in April. Nearly 8 million borrowers had loans in forbearance under the SAVE plan before a federal court officially ended the program in March, and those borrowers must choose an alternate payment plan by July 1, one that will likely carry a higher monthly payment. New rules under the One Big Beautiful Bill Act (OBBBA), including a cap on graduate borrowing, add a further headwind this summer.

Excluding student loans, nonrevolving credit rose $4.9 billion, concentrated in auto loans on the back of a strong tax refund season and a rebound in equity markets, gains that tend to flow toward higher income consumers first. The expiration of the electric vehicle (EV) tax credit, tariff passthrough and payback for purchases frontloaded in 2025 all threaten to cool vehicle demand, and with it, loan growth later this year.

Housing told an identical story from a different room in the same house. Existing home sales fell 2.4% in June to a SAAR of 4.09 million, below the 4.2 million consensus forecast, though a revision lifted May sales to 4.19 million. The decline trimmed the second quarter residential investment forecast to a 0.7% annualized pace from an earlier 1.1%, even though housing still looks set to add to growth for the first time since the fourth quarter of 2024.

Sales stood 2.8% above year ago levels, but the headline concealed a stark divide: sales of homes priced at $1 million or more rose 18% year over year, while the lowest price tiers stayed flat or declined. This is a pattern consistent with affordability indexes showing that buying a home has grown far easier for upper income, largely homeowning households than for younger renters. Inventory slipped 0.6% month over month and rose just 1.3% year over year, the smallest annual gain since November 2023. This leaves 4.6 months of supply as mortgage rates near their yearly highs keep both buyers and sellers on the sidelines.

• Key Takeaway: Credit and housing are describing the same economy from two different vantage points: households with assets, equity and good credit keep spending and buying, while those without either pull back, and nothing in this week’s data suggests the two groups are about to trade places.

Final Thoughts

This week traded one open question for a handful of smaller ones. Chair Warsh’s first appearance before Congress is unlikely to move markets or the forecast by itself, and the more informative signal keeps arriving from underneath him: prices cooling on a second front, a labor market holding a steady summer rhythm and a widening gap between the consumer who owns assets and the one who does not. The weeks ahead bring a run of inflation, retail sales and housing data dense enough to change the picture and to show whether the gap between comfortable and  stretched consumers keeps widening or finally starts to close.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2607-21