Economic Monitor – Weekly Commentary
by Eugenio Alemán

Consumption strong in August; income, not so much

September 26, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Consumption spending surprised to the upside once again in August, something we had already seen from last week’s release of retail and food services sales during the same month. However, growth in incomes is not accompanying this growth in consumption, and since lower-income households are maxed out, it is clear that financial gains are driving the recent acceleration in personal consumption expenditures.

Having said this, the Bureau of Economic Analysis once again revised the income numbers higher going back and thus presented a better picture of the state of households compared to what we had before, which puts today’s stronger consumption print under a better footing. However, the recent weakness in employment over the last several quarters and the increase in prices due to the impact of tariffs is going to hit consumers’ ability to keep pace with these rates of growth in consumer spending.

Higher-income consumers are probably relying on financial gains to continue to spend but lower-income consumers are struggling. If employment numbers continue to deteriorate, the recent strength of consumer demand will be challenged as we enter the last quarter of the year.

Economic growth better than previously reported in Q2 2025

One week after the end of the September Federal Open Market Committee (FOMC) meeting where the Federal Reserve lowered the federal funds rate by 25 basis points and the dot plot showed that Fed members were expecting to lower interest rates by 50 basis points before the end of the year, new and revised economic news is throwing a bucket of cold water on those expectations.

The Bureau of Economic Analysis (BEA) reported that economic growth during the second quarter of the year was revised up to a quarter-over-quarter seasonally adjusted rate of 3.8% on the back of higher personal consumption in services and a stronger nonresidential investment profile, especially real investment in equipment, which has been booming due to the CHIPS and IRA acts, and now stronger investment in equipment and software related to AI.

Trade in goods was also much more supportive in August, as firms reversed the large increase in imports recorded in July in advance of the increase in tariffs in August, with the non-seasonally adjusted trade deficit in goods dropping from $117.1 billion in July to $84.2 billion in August as both exports and imports of goods declined by 1.3% and 7.0%, respectively compared to July.

Meanwhile, new orders of durable goods were stronger than expected in August as new orders of transportation equipment, mostly defense and nondefense aircraft new orders, reversed the decline from the previous months. However, even if we stripped out large transportation items from new orders, the headline number was stronger than expected and recorded its fifth consecutive month-on-month advance.

Although we are still expecting employment growth weakness to continue, the argument that economic growth was slowing down is less certain today than it was a week ago, which will continue to complicate the Fed’s decision-making process. Today, the argument by the dovish members of the Fed is less supported than before and while we do expect overall weaker economic growth during the last quarter of the year, growth so far continues to surprise to the upside, which is inconsistent with the market’s view of two more rate cuts before the end of the year, especially if inflation continues to move higher.

A partial DOGE reversal seems to be in the offing

Although it is very difficult to know what is actually happening, recent news reports are pointing to a process of reversal of federal workers’ layoffs happening across the agencies most affected by such cuts earlier in the year. Some of the workers who have remained on the payroll but have not worked for more than five months have received letters telling them to report back to work on September 29, just two days before the end of the government’s fiscal year.

This decision is not going to affect those workers who accepted early retirement through the “Fork in the Road” (or Deferred Resignation Program), which, according to several sources, has been estimated at approximately 75,000. Furthermore, nobody knows at this time how many of the other estimated 125,000 to 225,000 workers who are still on the payroll due to court injunctions are being brought back to work. This means that although we are going to see some negative numbers coming from government workers dropping out during the next several months, our previous expectation that at most 300,000 workers are going to start dropping out of the employment numbers during the next several quarters is probably down considerably, depending on how many are being recalled back to work.

Furthermore, the potential for a government shutdown as early as next week will add to this uncertainty if it comes to fruition. Thus, we will have to wait and see how this process evolves, but for now, it is better news for the labor market and for the performance of the economy.

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Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

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