Mid-August Economic Outlook: Slowing Growth, Sticky Inflation

Last week was a bit quieter on the economic calendar, which gave everyone time to digest the bigger picture: the economy is slowing down, and inflation isn’t backing off as quickly as we’d like. Add in tariffs, government job cuts, and general uncertainty, and confidence is looking shaky for both businesses and consumers.

We’re not in crisis territory yet, but the signs are pointing toward a classic case of stagflation—slow growth paired with stubborn inflation. Here’s what we’re watching:

Growth and Fed Outlook

• GDP: Growth is barely hanging on above 1% for the rest of 2025, with only a modest improvement expected in 2026.
• Inflation: Core CPI is running hot at 3.5% this year and 2.9% next year.
• Federal Reserve: The Fed is likely to cut rates in September—and possibly two more times before year-end—to give the economy some breathing room.

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Signs of Stagflation Are Showing Up

• The ISM Services Index slipped to 50.1 in July, which is barely above contraction.
• New orders, activity, and jobs all moved lower. Prices moved higher.
• One transportation respondent summed it up: “Our business is flat. We are not trending up, or down. Tariffs are starting to show up and the increases are across the board.”

Inflation in the Pipeline

• Producer Prices (PPI) jumped 0.9% in July—the biggest gain in three years. Both goods and services are driving the increase.
• Consumer Prices (CPI) inched up 0.2% in July, but the core number (+0.32%) was the hottest since February. Tariff-heavy categories like household goods, airfare, and medical care are all showing pressure.
• Energy was the one bright spot: down 1.1% in July, thanks mostly to lower gasoline prices. But electricity bills are still climbing as data centers eat up more power.

The Tariff Effect

• Tariffs are slowly but surely filtering into consumer prices.
• For now, CPI has been stuck in the 2.3%–3.0% range for a year.
• But with no sign of tariff relief before 2029, the pressure isn’t going away anytime soon.

Productivity and Wages

• Productivity rose 2.4% in Q2, which gives businesses some wiggle room to pay higher wages without pushing inflation even higher.
• That said, the cooling job market means wage growth should start easing back.

Housing Snapshot

Starts: Up 4.6% in June, driven entirely by multi-family construction. Single-family homes actually fell. July starts are expected to soften a bit.

Sales: Existing home sales dropped 2.7% in June to 3.93 million units. Prices, however, keep climbing—up to $435,300, the second-highest June on record.

If the Fed does cut rates this fall, it could help mortgage rates a little—but only if the bond market is convinced inflation is truly cooling.

What’s Next

The big question for the next few months: Will consumers keep spending, or will they finally pull back as prices rise and job growth weakens? That decision could be the difference between a “moderate downturn” and something that feels a lot more like recession.

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