Despite a slew of recent macroeconomic data flashing warning signs, economists have upgraded their forecasts for U.S. third-quarter economic growth, reflecting expectations of stronger consumer spending and private investment, particularly in artificial intelligence (AI) related capital expenditure.

A monthly survey of 85 economists conducted from August 14-19 projects the U.S. gross domestic product (GDP) to expand at an annualized rate of 2.5% in the third quarter, up from the 2% predicted in the previous survey. Forecasts for the fourth quarter remained largely steady, holding within a narrow range of 2% to 2.2%.

"Tech and AI-related investment is the primary driver behind the uptick in corporate capital expenditure, while spending from higher-income households is fueling consumer outlays," noted James Knightley, chief international economist at ING. Industry research data suggests AI-related capital spending could exceed $1 trillion this year and surpass $1.5 trillion by 2027.

Meanwhile, inflation projections through 2027 have seen little adjustment. The core personal consumption expenditures (PCE) price index, which excludes food and energy, is expected to average 3.2% this year, easing to 2.5% by 2027. With core inflation showing signs of cooling, economists anticipate the Federal Reserve will hold interest rates steady until July next year.

Economists have also trimmed their forecasts for average monthly nonfarm payroll additions this year, now expecting around 66,000 new jobs per month, with a similar pace projected through 2027. "Employment and inflation data are cooling, and there is a sense that incoming Fed Chair Kevin Warsh may be less inclined to raise rates, which has made market pricing less aggressive. The probability of a September rate hike is now seen below 50%," Knightley added.

Warning Signs Multiply

The ongoing conflict in the Middle East continues to pose a risk to the U.S. economic outlook, as it could push oil prices and consumer prices higher while simultaneously weighing on growth. With inflation already running above the Fed's 2% target, a prolonged supply shock would create a more challenging situation for policymakers.

Several data releases this month have underscored the challenges facing the U.S. growth outlook. Earlier in August, the Labor Department reported that nonfarm payrolls fell by 23,000 in July, sharply missing expectations for an increase of 80,000. Additionally, May payroll gains were revised down to 63,000 from 129,000, and June figures were cut to 20,000 from 57,000—a combined downward revision of 103,000 for the two months.

The unemployment rate fell to 4.1% in July from 4.2% in June, the lowest level since June 2025 and below the 4.2% expected. However, the labor force participation rate continued to decline, dropping to 61.4% from 61.5%. While the unemployment rate remains low, it is largely due to workers exiting the labor force rather than a robust employment environment.

Wage growth also softened, with average hourly earnings rising 0.1% month-over-month in July, below both the 0.3% expected and the prior month's 0.3% gain. On an annual basis, wages rose 3.2%, missing the 3.5% forecast and the previous month's 3.5% increase. The jobs report suggests the U.S. labor market may be starting to weaken amid rising prices and uncertainty stemming from the Middle East conflict.

Adding to the concerns, U.S. retail sales fell 0.6% month-over-month in July, the steepest decline since May 2025 and well below consensus expectations for a 0.1% increase, marking a sharp reversal from the prior month's 0.2% gain. Given that consumer spending accounts for roughly 70% of U.S. GDP, retail sales data serves as a critical gauge for investors assessing the economy's health and the trajectory of monetary policy.

Consumer confidence also took a hit, falling for the first time in three months in August as households grew more worried about deteriorating business conditions and rising prices. The University of Michigan's preliminary reading showed the consumer sentiment index dropping to 51 in August, down from July's final reading of 55.2 and well below the 55 expected by economists. The survey revealed that consumers' inflation expectations have ticked up, with respondents now anticipating prices to rise 4.3% over the next year—a slight increase from the prior month and notably higher than pre-conflict levels seen in February.

Executives at major corporations including Kraft Heinz (KHC.US), McDonald's (MCD.US), and Whirlpool (WHR.US) have also voiced concerns, warning that consumer momentum may be nearing a tipping point. Walmart's (WMT.US) latest earnings report this week reinforced those warnings. Despite beating expectations on revenue and earnings per share, the retail giant's second-quarter same-store sales grew just 2.6%—the weakest pace in over six years and well below the 3.7% to 3.8% anticipated.

More tellingly, Walmart issued full-year earnings per share guidance that fell short of estimates, stoking investor fears that if even the retailer historically best positioned to benefit from trading-down trends is beginning to see deceleration, the turning point for the broader consumer economy could be approaching.