The last letter closed on a wager: a chair who had tightened by talking had bought himself time, and the September data would show what he bought it for. The data have now arrived, and they cut in opposite directions, with a hot core consumer price reading on one side and a labor market that has quietly stopped being the problem on the other. Markets responded by pricing a rate hike at this week’s meeting.

Executive Summary

• Core Consumer Price Index (CPI) inflation surprised to the upside in August at 0.3% month over month, with headline CPI up 0.4%, though the same source data translate into a more benign 0.2% gain in the core Personal Consumption Expenditures (PCE) index that the Federal Reserve actually targets.
• Financial markets now price a rate hike at the September 15-16 meeting almost in full, plus a further 25 basis points before year end, while some forecasters, including Oxford Economics, call for the Federal Open Market Committee (FOMC) to stay on hold.
• Nonfarm payrolls rose 162,000 in August against a consensus of 55,000, July’s reported decline flipped to a 21,000 gain and the three-month average climbed to 71,000 from 38,000, comfortably around the 50,000 breakeven pace.
• Wage growth kept cooling, with average hourly earnings growth easing to 3.1% year over year and the Oxford Economics wage tracker below 3% for the first time in five years.
• The Beige Book showed activity improving in 10 of 12 districts with no district contracting for a second consecutive report, even as employment rose only very slightly and five districts reported no change at all.
• The nowcast for third-quarter growth now runs at a 3.5% annualized rate, helped by a 1.1 percentage point contribution from equipment spending that largely offsets a trade drag of more than a point.
• Consumer sentiment dropped to 47.8 in early September from 51.7, and short-run inflation expectations jumped to 4.6% from 4.0% as gasoline climbed.

The Fed: A Decision on a Knife’s Edge

The FOMC meets on September 15 and 16 with less consensus around the outcome than at any meeting this year. Following the stickier August CPI report, financial markets have moved to price a hike almost in full, along with another quarter point before the end of the year. The rate decision may not even prove the most informative part of the meeting, since the updated projections and Chair Kevin Warsh’s press briefing will say more about where policy goes next, and internal research now suggests the neutral policy rate has risen since the start of the year.

Governor Christopher Waller supplied the clearest map of how a committee member might vote, departing from the chair’s reserved tone to make plain that this is a live meeting: continued progress toward 2% would let him support holding, while inflation coming in hot would have him consider a hike. August obliged with something in between, which is precisely why the meeting sits on a knife’s edge. Markets had already leaned hawkish after the strong August payroll report, penciling in two full hikes by March 2027.

The case for patience rests on a technical point that deserves more attention than it usually gets. Nonmarket services prices, primarily financial services and insurance, accounted for roughly half the increase in core PCE prices in the prior month’s report, and those prices are imputed rather than observed, which means they move for reasons that have little to do with what anything costs. A Bureau of Economic Analysis methodology change due at the end of September should lower annual core PCE inflation by two tenths of a percentage point, with the treatment of stock-trading fees doing much of the work, and this combination could be the support the Fed needs for a protracted hold through the rest of this year and into 2027. Measuring inflation partly by imputing what people would have paid for services nobody billed them for is a reasonable way to build a price index and a difficult way to set an interest rate.

The Beige Book pointed the same direction. The in-house prices index fell for a second consecutive report, consistent with the recent run of moderate inflation readings extending into August, even as a growing number of Federal Reserve officials appear to be running short of patience with inflation that keeps sitting above target. Energy remains the live risk on the other side, since global oil prices surged after United States military strikes on Iranian targets revived fears of supply disruption, and gasoline prices will likely stay elevated without a meaningful end to the war. President Donald Trump’s announcement of access to 65 billion barrels of Venezuelan oil reserves offers no near-term relief, since that figure describes reserves in the ground rather than shippable supply, and Venezuelan production runs at about 7% of United States capacity.

• Key Takeaway: This is the closest call the committee has faced all year, and the gap between what markets price and what some forecasts assume has rarely been wider. The resolution turns on whether the Fed reads the hot consumer price print or the tamer reading from its own preferred gauge, and a methodology change at the end of September may quietly settle the argument either way.

Inflation: One Gauge Runs Hot, the Other Does Not

August core CPI rose 0.3%, above both estimates and consensus, while headline CPI rose 0.4% as gasoline perked up. The trouble sat in non-housing core services, the category the Fed watches most closely because it reflects domestic demand, where airfares, motor vehicle maintenance and repair, lodging away from home and wireless telephone services all accelerated. Transportation services carry a particular warning, since they suggest energy costs are working their way into a broader set of consumer prices, a risk the central bank will watch closely as the Middle East situation could worsen ahead of the midterms.

Nearly everything underneath offered reassurance. Core goods prices decelerated, with weakness in apparel, some recreational goods and motor vehicle parts, while computer software and accessories declined outright, a detail that matters because those artificial intelligence (AI) related prices carry outsized weight in the PCE measure; tariff effects are adding roughly three tenths of a point to core CPI inflation and should fade from here. Housing came in as expected, and a jobless expansion paired with a rising rental vacancy rate should prevent any reacceleration in the single largest CPI category. Small businesses corroborated the calm, since actual and planned selling price increases held unchanged in August despite the run-up in diesel.

Producer prices told the energy half of the story plainly. The August Producer Price Index (PPI) rose 0.4% with core prices up 0.3%, lifting annual headline producer inflation to 5.4% from 4.8% and core to 4.6%. Energy did the lifting at 4.2% on the month, and another increase looks likely in September, with diesel up nearly 60 cents and gasoline close to 20 cents within the survey window. The passthrough already shows in transportation and warehousing costs, up 2.3% for their largest monthly rise since April. Food prices rose a benign 0.1%, though diesel feeds grocery costs with a lag of up to nine months, so the reprieve looks temporary.

Put the two reports together and the Fed’s own gauge looks considerably calmer than the headline that moved the market. Mapping the CPI and PPI details points to a 0.37% rise in headline PCE prices and a more modest 0.19% increase in the core, a path that would nudge annual headline PCE inflation down to 3.6% from 3.7% while the core holds at 3.3%. Two thermometers hang in the same room, and this month they disagree by enough to decide an interest rate.

• Key Takeaway: Core consumer prices ran hot in exactly one place, non-housing core services, and that place carries the fingerprint of energy rather than of broad domestic overheating. The Fed’s preferred measure looks tamer, so the September decision may come down to which instrument the committee trusts.

The Labor Market: Solid Enough to Leave the Stage

The August employment report beat everyone. Nonfarm payrolls rose 162,000 against a consensus of 55,000, July’s reported 23,000 decline turned into a 21,000 gain, June moved higher too and the three-month average of job growth climbed to 71,000 from 38,000, still in the neighborhood of the roughly 50,000 breakeven pace. A 40,000 rebound in state and local government employment supplied much of the lift, exactly the payback that the July collapse implied, while manufacturing appears to have turned a corner and job losses in information and financial activities may carry an AI fingerprint. The unemployment rate rose five hundredths to 4.14% unrounded, for the encouraging reason that the labor force and household employment both grew, with participation up two tenths to 62.6%, though the prime-age rate stayed flat.

One strong month does not make an overheating labor market, and the rest of the evidence describes something closer to stillness. Private payrolls in the Automatic Data Processing (ADP) report rose only 38,000 in August, with the three-month average cooling to 60,000 from 107,000 in June. The July Job Openings and Labor Turnover Survey (JOLTS) showed the hiring rate falling to 3.2% from 3.4% while the layoff rate ticked down to 1%, the familiar no-hire, no-fire arrangement. The quits rate slipped a tenth to 1.9%, which is what happens when workers doubt they could find something better. Openings edged up 89,000 to 7.27 million even as June saw a 177,000 downward revision, leaving the ratio of openings to unemployed workers above one and the market roughly in balance.

Layoffs stayed conspicuously absent. Initial claims ticked up 2,000 to 206,000 in the week ended August 29, with announced job cuts from Challenger, Gray and Christmas the lowest for any August since 2022, then eased 1,000 to 206,000 in the week ended September 5, matching a four-week average at the same level. Unadjusted claims now run nearly 14% below year-ago levels, and continued claims fell to 1.774 million, some 7% lower than a year ago. Small firms echoed the reading, with hiring intentions dipping in August only after July had carried them to their highest level in nearly four years.

Wages are the part that matters for policy, and they keep cooling. Average hourly earnings rose 0.3% on the month while annual growth eased to 3.1% from 3.2%, and the broader Oxford Economics wage tracker fell below 3% for the first time in five years. The ADP measure for all workers slipped a tenth to 3.2%, and the only series still trending up covers job changers, a group whose ranks the low quits rate keeps thin. Set 3% wage growth against productivity running above 2% and the arithmetic points down rather than up.

• Key Takeaway: August was a strong month inside a stable trend, not the start of an overheating. Hiring stays slow, firing stays rare, and wage growth below 3% against productivity above 2% means the labor market has handed the inflation argument back to energy prices and imputed services.

Growth, Trade and the Ledger

The expansion keeps running on productivity rather than payrolls. The Beige Book found activity improving in 10 of 12 districts in the six weeks to August 24, with the in-house activity index easing to 0.74 from 0.80 and no district reporting contraction for a second consecutive report —the longest such streak since mid-2024. Employment, by contrast, rose only very slightly: five districts reported no change, and AI turned up more often in the commentary, boosting efficiency while cutting both ways on hiring, with some districts seeking AI engineers and contacts in Cleveland, Richmond and New York rethinking entry-level and administrative roles. Where wages did rise meaningfully, they rose in construction and manufacturing, the trades the AI buildout actually employs.

The productivity data supply the mechanism. Second-quarter productivity growth held at 1.4% for an annual pace of 2.2%, with manufacturing contributing heavily as a 5.4% rise in output met a 2.9% increase in hours. The more interesting detail sat in the non-financial corporate sector, where capital and technology spending concentrates: productivity there grew 2.2% and has run ahead of the nonfarm business measure since the second quarter of 2025, which may offer an early read on gains spreading to the rest of the economy as adoption widens. Unit labor costs, revised down a tenth to 1.2% annualized, confirm that none of this is coming out of a wage spiral.

Both purchasing manager surveys pointed to steady growth with the same lagging component. The Institute for Supply Management (ISM) manufacturing index eased a point to 54.6 while new orders and order backlogs held well inside expansion and customer inventories stayed in territory that signals firms need to restock. Its employment index slipped 1.6 points to 51.2 yet managed two consecutive months of expansion for the first time since 2022. The services index rose 1.3 points to 55.4, its strongest since February, and a weighted average of the two points to growth above 2% annualized in the third quarter, though the services employment index remained in contraction. Prices went the wrong way on both: manufacturing input costs held at an elevated 71.1 after a post-war peak of 84.6, and the services prices index jumped 2.3 points to 72.6, its highest since August 2022, with respondents naming the Middle East conflict and tariffs.

Trade delivered the paradox this letter keeps returning to. The July deficit widened to $88.6 billion from $73.3 billion, the largest since March 2025, as imports rose 2.8% against a 2.1% fall in exports, and the strength in imports sat entirely in capital goods, where a $14.4 billion rise left the category a staggering 46% above year-ago levels on computers, computer accessories and semiconductors. Net trade looks set to subtract more than a point from third-quarter growth, almost exactly offset by a 1.1-point contribution from the equipment spending those same imports represent. Construction told a two-sided story as well, falling 0.5% in July and dragging the residential investment nowcast to a 3% annualized decline from 1.6%, while business structures improved to a 1.5% decline from 4.1% as data-center construction kept running and power structures picked up. Add it together and the third-quarter growth nowcast now tracks 3.5% annualized. The ledger, as ever, quietly worsens. Treasury reported a $167 billion August deficit against $345 billion a year earlier, an improvement that is entirely a calendar fiction, since the August gap would have come in $9 billion wider on comparable terms. The fiscal year-to-date shortfall of $1.966 trillion sits $7 billion below last year, yet absent the same quirks it would stand $81 billion higher. Corporate receipts have fallen 24.3% under the One Big Beautiful Bill Act, customs receipts managed a 1.3% annual gain and roughly $40 billion of an anticipated $160 billion in tariff refunds has yet to go out the door. Against that backdrop, the President floated $5,000 checks for all adult citizens should Republicans hold both chambers after the midterms, a program costing as much as $1.25 trillion, or 3.8% of gross domestic product (GDP), and exceeding what Treasury will spend this year on defense, Medicare or interest. There is a very low probability the trifecta would allow it.

• Key Takeaway: Growth is tracking well north of 3% on productivity, equipment spending and a restocking cycle, with jobs contributing almost nothing to the total. The pattern is durable while it lasts, and the fiscal arithmetic keeps deteriorating underneath it in a way no single quarter makes urgent.

The Consumer and Housing: Wealth Holds, Mood Breaks

Consumers are spending like one group and answering surveys like another. The preliminary September reading of the University of Michigan sentiment index fell to 47.8 from 51.7, below the 51.4 forecast, with the assessment of current conditions falling and the view of the year ahead falling harder. Short-run inflation expectations jumped to 4.6% from 4.0% as gasoline climbed, and the long-run measure ticked up a tenth to 3.4%. The split by income keeps widening, since sentiment deteriorated among lower- and middle-income households while rising among upper-income ones, and economists anticipate that the upper tier will carry consumer spending growth of around 2% through the rest of the year.

The spending data are considerably more cheerful than the mood. Consumer credit rose $18.1 billion in July, with nonrevolving credit up $15.3 billion against a more modest $2.8 billion in revolving credit, whose annual growth slowed to 3.6% from 4.1% as the tax-refund tailwind faded. Excluding student loans, nonrevolving credit rose $10.2 billion, essentially an auto lending story. Student loans grew just $0.3 billion in the first month that the borrowing caps and stricter repayment rules under the One Big Beautiful Bill Act applied, and since borrowers need not switch to the new income-driven plan until 2028, the effect will show up only gradually.

Vehicles made the point in the plainest terms available. Sales jumped to a 16.8 million annualized pace in August, the strongest since April 2025 when buyers were front-running tariffs, leaving third-quarter sales tracking 1% above the second. Higher pump prices have tilted the mix toward hybrids, whose share peaked at 17.1% in May against 13.9% in February, and gasoline has averaged above $4 a gallon since mid-July. Fully electric and plug-in hybrids account for just 6.8% of sales after averaging above 9% in 2025. The top fifth of the income distribution buys more than half of all new vehicles by dollar value, which is why sales can boom while sentiment sinks, and the September baseline looks for 16 million sales this year against 16.2 million in 2025.

Housing remains where the cost of higher-for-longer shows up most plainly. Existing home sales fell 2% in August to 3.98 million, down 1.2% from a year earlier, adding downside risk to a forecast of residential investment declining at a 2.1% annualized pace. The more telling signal was inventory, which rose 3.2% on the month and 5.9% over the year, an unusual direction once the spring selling season has passed and a plausible sign that homes are sitting longer, leaving 4.9 months of supply at the August pace. The median price fell 1.7% on the month while holding a 1.6% annual gain, with the forecast still near 2% growth. The cause sits in the bond market rather than at the Fed: after briefly touching 6% before the war with Iran, mortgage rates now run near 6.75%, which has pushed the monthly payment on a median-priced home up nearly $300, or 15%.

• Key Takeaway: The consumer who owns assets keeps buying cars while the consumer who buys gasoline keeps answering surveys badly, and the aggregate numbers describe neither one accurately. Housing is the clearest casualty of long rates that higher oil prices, heavier public borrowing and a surge in corporate issuance have pushed up regardless of what the Fed decides this week.

Final Thoughts

The question left hanging two weeks ago has an answer, and the answer is that nobody agrees. Core consumer prices ran hot at 0.3%, the labor market delivered a 162,000-payroll gain that removed any excuse for worrying about jobs and markets promptly priced a hike this week plus another before year end. Against that, wage growth slipped below 3%, the Beige Book price index fell for a second straight report and the Fed’s own preferred gauge looks set to come in near two tenths for the core.

Growth, meanwhile, has quietly become the least controversial thing in the economy, tracking 3.5% annualized on productivity, equipment spending and a restocking cycle that owes almost nothing to hiring. That is a comfortable place for an expansion to sit and an uncomfortable place for a central bank, since an economy this strong offers little cover for patience if the next price print misbehaves. Wednesday settles one question and opens several more, and for once the interesting part of the meeting may be the projections rather than the decision.

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-2609-21

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