Consumer spending and private investment support growth! Amid several data "red flags," economists raise US Q3 GDP growth forecast to 2.5%

According to Zhitong Finance APP, amid several recent red-flag macro data points, economists have raised their forecasts for U.S. economic growth in the third quarter, reflecting heightened expectations for consumer spending as well as private investment in areas such as artificial intelligence (AI) related capital expenditures.

A monthly survey of 85 economists conducted from August 14 to 19 shows that U.S. gross domestic product (GDP) is now expected to grow at an annualized rate of 2.5% in the third quarter, up from 2% in the previous survey; forecasts for fourth-quarter growth changed little, remaining within a narrow range of 2% to 2.2%.

James Knightley, Chief International Economist at ING, stated: “Tech/AI-related investment is the main factor driving increased corporate capital expenditures, while spending by high-income households is the primary source of consumer spending growth.” According to data from industry research analysts, total capital outlays related to artificial intelligence could exceed $1 trillion this year, and reach more than $1.5 trillion by 2027.

Meanwhile, economists have also made minimal adjustments to inflation forecasts before 2027. The Personal Consumption Expenditure (PCE) price index excluding food and energy is expected to average a year-on-year increase of 3.2% this year, and then decline to 2.5% by 2027. As the so-called core PCE price gauge signals easing inflation, economists expect the Federal Reserve to keep interest rates unchanged until July next year. Economists have also lowered their average forecast for nonfarm payroll additions this year, now expecting only 66,000 new jobs per month, and project a similar monthly job growth rate for 2027.

Knightley commented, “Both employment and inflation data are cooling, and the market senses that the new Federal Reserve Chair, Kevin Walsh, has a lower inclination to raise rates, making market pricing less aggressive. Currently, the probability of a rate hike in September is now below 50%.”

Multiple Data Red Flags

It is noteworthy that ongoing conflict in the Middle East continues to pose risks to the U.S. economic outlook, as it could drive up oil prices and consumer costs further, while also weighing on economic growth. With the inflation rate remaining above the Fed’s 2% target, prolonged supply shocks would put policymakers in a more difficult position.

Multiple data points released so far this month have highlighted the challenges facing U.S. economic growth prospects. Earlier this month, U.S. Department of Labor data showed that nonfarm payrolls decreased by 23,000 in July, far below market expectations of an 80,000 gain. Meanwhile, the number of nonfarm jobs added in May was revised from 129,000 down to 63,000, and June’s number was moved from 57,000 down to 20,000; in total, the combined additions for May and June after revision were 103,000 lower than previously reported.

The unemployment rate fell from 4.2% in June to 4.1% in July, marking the lowest level since June 2025 and below market expectations of 4.2%. Labor force participation continued to drop, down from 61.5% in June to 61.4% in July. Although the unemployment rate remains low, this is largely because a large number of workers have exited the labor market, rather than due to a robust employment situation. In terms of wage growth, the average hourly earnings in July rose just 0.1% month-on-month, below both the 0.3% market expectation and June’s 0.3%; year-on-year growth was 3.2%, also lower than the market expectation and June’s 3.5%. This nonfarm payrolls report suggests the U.S. labor market may be beginning to weaken under the pressure of rising prices and uncertainties caused by the Middle East war.

In addition, U.S. retail sales in July shrank 0.6% month-on-month, the biggest drop since May 2025, missing the market’s consensus expectation of a 0.1% increase and falling sharply from a 0.2% increase in the previous month. Since approximately 70% of U.S. GDP comes from consumer spending, retail sales data serve as a key indicator for investors to gauge the current state of the U.S. economy and the future of monetary policy.

As households become increasingly concerned about worsening business conditions and rising prices, U.S. consumer confidence fell in August for the first time in three months. Preliminary data from the University of Michigan showed the August consumer confidence index dropped to 51 from a final July reading of 55.2, well below economists’ expectation of 55. The survey revealed heightened U.S. consumer inflation concerns. Respondents expect prices to rise 4.3% in the next year, slightly up from the previous month and notably higher than before the eruption of conflict in the Middle East in February this year.

CEOs of several leading companies, including Kraft Heinz (KHC.US), McDonald’s (MCD.US), and Whirlpool (WHR.US), have also made frequent statements warning that consumer momentum may be approaching a critical point. The latest earnings report released this week by Walmart (WMT.US) further validates such warnings. Despite revenues and earnings per share both exceeding market expectations, Walmart’s same-store sales grew just 2.6% in the second quarter, the lowest level in more than six years and well below the market consensus of 3.7% to 3.8%. More importantly, Walmart’s full-year earnings per share guidance was lower than expected, raising concerns among investors that if even Walmart—a retailer historically strong in downturns—begins to see slowing growth, then the inflection point for the overall consumer economy may be near.