The Iran conflict, ongoing peace negotiations, and gyrating oil prices continue to stir the headlines. Yet, lower gasoline prices are helping moderate inflation and providing relief to consumers.
Meanwhile, there are fresh concerns on the trade front. The U.S. declined to renew the U.S.-Mexico-Canada Agreement (USMCA). The trade pact needs updates such as digital trade, agriculture, automotive supply chain rules, and labor rights. Given the importance of cross-border trade and integrated supply chains to the growth of the North American economy, we expect the USMCA differences will get ironed out. Additionally, tariffs have returned to the spotlight with the temporary tariffs used to replace those struck down by the Supreme Court expiring in the last week of July. But tariffs won’t go away; instead, they will largely shift to other tariff statutes relating to unfair trade practices.
The service sector, which accounts for the majority of economic activity, has been treading water since March. Encouragingly, inflation pressures eased as the prices-paid component of the ISM Services survey cooled sharply, offering a positive sign that cost pressures may be moderating. Similar trends appeared in the ISM Manufacturing Index which slipped following May’s improvement. The manufacturing prices component eased as well. Manufacturing continues to struggle with challenges from uneven demand and uncertainty surrounding the economic outlook.
The labor market remains in “low hire, low fire” mode. The combination of elevated openings alongside steady hiring, layoffs, and quits suggests that labor market normalization proceeds gradually. The labor market is cooling but fundamentally stable: Employers aren’t cutting staff, and workers aren’t changing jobs.
Consumers have seen lower gasoline prices over the past weeks. That helps offset lingering inflation pressures and supports consumer spending during the second half of the year. Additionally, an increase in new vehicle sales suggests that consumers are willing to make large-ticket purchases despite elevated interest rates and economic uncertainty. The strength in auto sales points to underlying resilience in household finances and confidence.
Housing remains under pressure with existing home sales down in June. The combination of elevated prices, high financing costs, and limited inventory continues to limit transaction activity across much of the housing market.
Federal Reserve (Fed) Chairman Kevin Warsh will head to Capitol Hill for the semi-annual Congressional testimony. We expect that Warsh will focus his remarks on ongoing work central to how the Fed conducts monetary policy, including Fed communications and the inflation frameworks. If inflation data continues to show cooling, we believe the threshold for a 2026 Fed rate hike remains high.
Bottom line
The U.S. economy continues to chug along despite challenges such as gasoline prices and geopolitical uncertainty. A broad range of incoming economic data suggests moderating inflation alongside steady but uneven growth, while the recent drop in energy prices is offering some near-term relief to consumers. That unevenness maintains the feeling that the economy has “one foot on the gas, one foot on the brake.” Based on current conditions, we believe the bar remains high for a 2026 Fed rate hike.
