Consumer Savings Improve as Fed Rate Expectations Rise

This week’s economic data includes: (1) consumer confidence for August, (2) Personal Consumption Expenditure (PCE) price index, personal income, and personal spending for July, (3) weekly initial jobless and continuing claims and (4) market trends across equities, oil and Treasury markets, including changes in Fed rate expectations and a preview of next week’s key economic releases.

KEY SUMMARY:

Consumer confidence reflects a resilient consumer today but a cautious consumer tomorrow, as improving labor market perceptions were overshadowed by growing concerns about business conditions, job prospects, and income growth over the next six months.

Consumer confidence slipped modestly in August, with The Conference Board Consumer Confidence Index falling 0.8 points to 89.4. While consumers became more pessimistic about business conditions, job prospects, and income growth over the next six months, assessments of current economic conditions improved. The Present Situation Index rebounded to 121.2 after three consecutive monthly declines, supported by a stronger labor market outlook. Notably, the labor market differential, the share of consumers saying jobs are plentiful minus those saying jobs are hard to get, climbed to 7.5 from 2.7 in July, a sign that consumers perceive labor market conditions as improving. However, the Expectations Index fell further to 68.2, remaining well below the recession-warning threshold of 80 and signaling continued concern about the economic outlook.

Consumers’ inflation expectations moved slightly higher in August, while most still expect interest rates to rise over the next year. Stock market sentiment remained generally positive, with a majority expecting equity prices to increase. Spending intentions were mixed, with auto purchase plans remaining relatively strong and homebuying expectations continuing their gradual recovery despite a slight monthly decline. At the same time, consumers became more cautious toward discretionary purchases and travel-related spending, while maintaining plans to spend on everyday services such as restaurants, utilities, and streaming services. Overall, the report suggests consumers remain resilient and relatively comfortable with current economic conditions, but increasingly cautious about future growth, employment, and income prospects.

Despite persistent inflation that remained above the Fed’s target, July’s PCE report offered a constructive signal as core inflation met expectations, incomes and savings strengthened, and consumer spending showed only modest signs of cooling amid continued resilience in services demand.

July’s PCE report showed inflation remaining sticky but broadly stable. The headline PCE price index rose 0.2% in July, exceeding expectations, while annual headline inflation held steady at 3.7%. Services inflation accelerated to 0.3%, driven largely by portfolio management and investment advice services, while goods prices declined for a second consecutive month. Core PCE inflation, the Federal Reserve’s preferred underlying inflation measure, increased 0.2% during the month and remained unchanged at 3.3% year over year, matching market expectations. Meanwhile, supercore inflation also held steady at 3.4% on an annual basis.

Consumer income and savings strengthened during the month. Personal income increased 0.4%, exceeding expectations and reflecting gains in wages, investment income, and government benefits. Disposable income rose 0.5%, while real disposable income increased 0.4% after adjusting for inflation. As income growth outpaced spending growth, the personal saving rate improved to 3.0% from 2.6% in June, suggesting households continued to rebuild financial cushions despite persistent inflation pressures.

Consumer spending remained positive but showed signs of moderation. Personal spending increased 0.2% in July, led by services spending, while goods spending declined broadly across both durable and nondurable categories. After adjusting for inflation, real consumer spending was unchanged, down from a 0.4% increase in June. The weakness in goods spending likely reflected a timing effect from Amazon’s decision to hold Prime Day in June this year versus July last year, which appears to have pulled forward some consumer purchases and weighed on July spending figures. Overall, the report points to a consumer sector that remains resilient but is gradually slowing, with stronger income growth helping offset softer spending momentum.

The latest jobless claims data reinforce the narrative of a resilient labor market, as both new unemployment filings and continuing claims declined, layoffs remained limited, and workers continued to find jobs without signs of meaningful labor market deterioration.

Weekly initial and continuing jobless claims both declined in the latest reporting periods, underscoring the continued resilience of the labor market. Initial claims fell by 4,000 to 203,000 for the week ended August 22, coming in below expectations and remaining below year-ago levels for the 28th consecutive week, while continuing claims declined by 18,000 to 1.778 million for the week ended August 15 (reported with a one-week lag relative to initial jobless claims). Although the four-week moving averages of both measures edged slightly higher, they remain well below year-ago levels, the insured unemployment rate held steady at 1.2%, and layoffs appear limited. Overall, the data point to a stable labor market with little sign of deterioration and no immediate concern for the Fed.

Markets shrugged off strong earnings and lower oil prices but turned more cautious after Fed Chair Warsh’s hawkish Jackson Hole remarks, which drove short-term Treasury yields higher, pushed rate-hike expectations forward, and set the stage for next Friday’s payroll report to become the market’s most important test of the Fed’s higher-for-longer outlook.

Equity markets delivered modest gains for the week despite a pullback on Friday. Stocks were supported midweek by strong earnings results and upbeat revenue guidance from Nvidia and other major semiconductor and software companies. However, investor sentiment turned more cautious after Fed Chair Kevin Warsh’s Jackson Hole remarks, where he reaffirmed the Fed’s commitment to reducing inflation to its 2% target and signaled that policymakers still have additional work to do on price stability. For the week, the Nasdaq led gains, rising 0.85%, followed by the Dow (+0.53%) and S&P 500 (+0.49%), while the Russell 2000 declined 1.51%.

In commodity markets, crude oil prices moved lower as geopolitical risk premiums eased. Market participants responded positively to discussions surrounding a potential Iran-Oman shipping corridor and indications that the U.S. may favor economic sanctions over military escalation. As a result, Brent crude fell 5.4% to $89.31 per barrel, while West Texas Intermediate (WTI) crude declined 4.2% to $83.40 per barrel.

Treasury yields steepened during the week as short- and intermediate-term yields rose while longer-term yields were largely unchanged to slightly lower. The move reflected growing expectations that Fed policy may remain restrictive for longer following Warsh’s hawkish comments. On Friday alone, the 2-year Treasury yield jumped 14 basis points to 4.34%, while the 10-year yield rose 6 basis points. Forward-rate markets echoed this shift, with 3-year forward Treasury rates moving 6 to 9 basis points higher across the curve, while 7-year forward rates were little changed, resulting in a flatter forward curve and signaling greater concern about near-term interest rates than longer-term inflation risks.

Rate expectations became notably more hawkish during the week. Whereas markets previously anticipated a single 25-basis-point rate hike in December 2026 and only a probability of a second increase by late 2027, investors now fully price in two rate hikes occurring earlier, in October 2026 and March 2027. The implied probability of a September rate hike also rose to roughly 60%, up from 40% a week earlier, while markets began assigning a meaningful probability to a third rate increase later in 2027.

Looking ahead, next week’s economic calendar will be highlighted by several key labor market and activity indicators, including ISM Manufacturing, JOLTS job openings, jobless claims, and ISM Services. However, the primary focus will be Friday’s August employment report, where economists expect non-farm payrolls to increase by 55,000 following a decline of 23,000 in July, while the unemployment rate is projected to hold steady at 4.1%. Given the market’s heightened sensitivity to Fed policy expectations, investors will pay particularly close attention to the payroll report for evidence of labor market strength or weakness that could influence the timing and magnitude of future rate hikes.

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DETAILED ANALYSIS:

Consumer Confidence – August Update:

The Conference Board Consumer Confidence Index edged down 0.8 points to 89.4 in August from 90.2 in July, marking a second consecutive monthly decline. The modest decrease reflected growing consumer pessimism about future business and labor market conditions, which more than offset improved perceptions of current economic conditions. Overall confidence remains subdued, with consumers continuing to express concerns about inflation, employment prospects, and geopolitical and trade-related uncertainties.

Present Situation Index

The Present Situation Index, which measures consumers’ assessment of current business and labor market conditions, rose 6.8 points to 121.2 in August after three consecutive monthly declines. Labor market perceptions improved notably, with the labor market differential, the share of consumers saying jobs are “plentiful” minus those saying jobs are “hard to get,” rising sharply to 7.5 from 2.7 in July. The improvement was driven by an increase in consumers reporting jobs are plentiful and a decline in those reporting jobs are hard to find. This measure continues to be closely watched by markets as a key indicator of labor market momentum. Views of current business conditions also improved modestly, with the net share describing conditions as good versus bad increasing slightly.

Expectations Index

The Expectations Index, which tracks consumers’ outlook for income, business conditions, and labor market conditions over the next six months, fell 5.8 points to 68.2. The index remains well below the recession warning threshold of 80, suggesting ongoing concern about the economic outlook. Expectations for business conditions, job availability, and household income all softened during the month. The net share of consumers expecting better business conditions declined to

-6.3%, while expectations for the labor market deteriorated further to -11.5%. Income expectations remained positive but weakened, with the income differential falling to 3.8 from 6.9 in July.

Demographics

On a six-month moving average basis, confidence softened slightly across all age groups but remained highest among consumers under age 35. By generation, Gen Z continued to report the strongest confidence levels, followed closely by Millennials. Confidence was generally stronger among higher-income households, while lower-income groups remained less optimistic. By political affiliation, confidence weakened among Republicans and Independents but improved modestly among Democrats.

Inflation and Recession Sentiment

Consumers’ inflation expectations moved slightly higher in August. Average one-year inflation expectations increased to 5.8% from 5.6%, while the median expectation rose to 4.7% from 4.6%. Despite the uptick, inflation expectations remain below the elevated levels seen earlier this year. Meanwhile, 61.3% of respondents still expect interest rates to rise over the next 12 months, although that share declined modestly from 62.0% in July. Equity market sentiment remained constructive, with 52.5% of consumers expecting stock prices to increase over the next year, compared with 24.5% expecting declines. Recession concerns remained elevated, with the share of respondents viewing a U.S. recession as “very likely” over the next 12 months increasing modestly.

Spending and Purchase Plans

Consumers’ spending intentions were mixed in August. Auto purchase plans remained relatively strong, though they eased modestly from July, with a continued preference for used vehicles over new cars. Homebuying intentions declined slightly but maintained the gradual improvement seen over the past year. Purchase plans for durable goods generally softened, with notable declines in intentions to purchase televisions and several household appliances.

Spending plans for services moderated after strengthening in July. Restaurants, bars, takeout, utilities, and streaming/mobile services remained the most frequently cited spending categories, while planned spending on hotels, airfare, entertainment venues, and other discretionary travel activities weakened. Overall, consumers appear to be maintaining spending on everyday services while becoming somewhat more cautious toward larger discretionary purchases and travel-related spending.

PCE Price Index & Personal Income and Outlays – July Update: 

The Bureau of Economic Analysis (BEA) released its July report on the PCE price index, personal income, and personal spending:

PCE Price Index

The headline PCE price index increased 0.2% month over month in July, following a 0.1% decline in June and exceeding market expectations of a 0.1% increase. The gain was driven primarily by a 5.6% increase in portfolio management and investment advice services, which alone contributed 0.1 percentage point, accounting for roughly half of the monthly increase. Beginning next month, the BEA will revise its price measurement methodologies for several categories, including legal services, computer software, and portfolio management and investment advice. These changes are expected to modestly lower future PCE inflation readings.

Goods prices declined 0.1% in July, following a 0.6% decrease in June and marking the second consecutive monthly decline. Durable goods prices rose 0.4%, after being unchanged in May and June, driven by increases in personal computers and peripheral equipment (+3.5%), video and audio equipment (+2.1%), motor vehicle parts and accessories (+1.5%), and recreational books (+4.9%). These gains were partially offset by declines in furnishings and durable household equipment (-0.9%) and photographic equipment (-1.4%).

Nondurable goods prices fell 0.4% in July after declining 1.0% in June, reflecting lower energy prices (-2.7%), grocery prices (-0.1%), and clothing and footwear prices (-0.1%).

Services prices increased 0.3% in July, accelerating from a 0.1% gain in June. The increase was led by portfolio management and investment advice (+5.6%), commercial banking services (+0.8%), and telecommunications services (+0.7%), partially offset by declines in hotel and motel prices (-3.3%), motor vehicle rentals (-3.0%), and postal and delivery services (-0.6%). Housing and healthcare services, the two largest components of the PCE price index by weight, increased 0.3% and 0.2%, respectively, in July. Housing inflation accelerated from 0.2% in June, while healthcare inflation moderated from 0.3%.

On a year-over-year basis, headline PCE inflation remained unchanged at 3.7% in July, above market expectations of 3.6%. Goods prices and services prices each increased 3.7% from a year earlier. Notable increases included computer software and accessories (+21.2%), grocery prices (+2.4%), and energy prices (+25.1%). Combined food and energy inflation moderated slightly to 6.7% from 6.8% in June.

Core PCE inflation, which excludes food and energy, rose 0.2% month over month in July, up from 0.1% in June and in line with market expectations. On a year-over-year basis, core inflation remained unchanged at 3.3%, also matching market expectations.

Supercore PCE inflation, which excludes food, energy, and housing, also increased 0.2% during the month, up from 0.1% in June. On a year-over-year basis, supercore inflation held steady at 3.4%.

Personal Income and Saving

Personal income increased 0.4% month over month in July, accelerating from 0.2% in June and exceeding market expectations of 0.2%. Total income rose by $115.1 billion, supported by gains in private-sector wages and salaries (+$38.6 billion), personal income from assets such as interest and dividends (+$19.9 billion), and Medicare and Medicaid benefits (+$25.9 billion). On a year-over-year basis, personal income growth slowed slightly to 3.7% from 3.9% in June.

Disposable personal income increased 0.5% in July, up from 0.2% in June. On an annual basis, disposable income rose 4.2%, slightly below June’s 4.3% pace.

After adjusting for inflation, real disposable income increased 0.4% in July, compared with 0.3% in June. Year-over-year growth remained unchanged at 0.5%, supported in part by lower energy costs.

Personal saving increased by $89.4 billion to $712.0 billion. The rise reflected a $125.9 billion increase in disposable income that more than offset a $36.5 billion increase in spending. As a result, the personal saving rate increased to 3.0% from 2.6% in June.

Personal Spending 

Personal spending increased by $36.3 billion, or 0.2%, in July, slowing from 0.3% in June but exceeding market expectations of 0.1%. Growth was driven primarily by services spending, while goods spending declined broadly.

Goods spending fell 0.7% month over month following no change in June. Durable goods spending declined 1.0%, reflecting broad-based weakness across categories, including motor vehicles and parts (-1.2%), furnishings and durable household equipment (-0.7%), and recreational goods and vehicles (-1.8%).

Nondurable goods spending also declined 0.6% in July, matching the decline in June. The decrease was driven by lower spending on gasoline and other energy goods (-2.8%), groceries (-0.2%), clothing and footwear (-0.4%), and other nondurable goods (-0.4%).

Services spending increased 0.6% in July, up from 0.5% in June. Growth was led by portfolio management and investment advice (+6.3%), motor vehicle services (+1.0%), electricity and gas services (+0.9%), ground transportation (+0.9%), and accounting and other business services (+1.0%).

On a year-over-year basis, consumer spending increased 5.9%, down from 6.4% in June. After adjusting for inflation, real consumer spending was unchanged in July, down from a 0.4% increase in June and in line with expectations. Real goods spending declined 0.6%, reflecting broad-based weakness, particularly in motor vehicles and parts (-1.6%) and recreational goods and vehicles (-2.9%). The weakness in goods spending likely reflects a timing effect from Amazon’s decision to hold Prime Day in June this year versus July last year, which appears to have pulled forward some consumer purchases and depressed July spending figures.

Real services spending increased 0.3% in July, marking a fourth consecutive monthly gain, though down from 0.4% in June. Growth was broad-based, led by household utilities (+0.5%), transportation services (+0.6%), and accommodations (+1.6%). The moderation from June suggests a smaller boost from World Cup-related spending. On a year-over-year basis, real consumer spending growth slowed to 2.1% from 2.6% in June.

Weekly Jobless Claims – Week Ending August 22:

The Labor Department reported that initial jobless claims fell by 4,000 to 203,000 for the week ended August 22, below both the prior week’s revised 207,000 and market expectations of 208,000. Claims have remained below year-ago levels for 28 consecutive weeks, signaling continued labor market resilience. While the four-week moving average edged up by 1,250 to 205,500, it remains well below the 228,000-level recorded a year ago, indicating that layoffs continue to be limited.

Continuing claims, which reflect the number of individuals receiving unemployment benefits and provide insight into workers’ ability to secure new employment, declined by 18,000 to 1.778 million for the week ended August 15 (reported with a one-week lag relative to initial jobless claims), down from a revised 1.796 million in the prior week. The reading came in below expectations and remained well below year-ago levels. Meanwhile, the insured unemployment rate held steady at 1.2%, and the four-week moving average of continuing claims rose modestly by 250 to 1.789 million. Overall, the data points to a stable labor market, with little evidence of deterioration and no immediate concern for the Fed.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets posted modest gains for the week despite finishing slightly lower on Friday. Midweek, stocks rallied on the back of strong corporate earnings and upbeat revenue guidance from Nvidia and other leading semiconductor and software companies. However, sentiment reversed on Friday following Fed Chair Kevin Warsh’s keynote address at the Jackson Hole Economic Symposium, where he struck a hawkish tone by reaffirming the Fed’s commitment to its 2% inflation target, highlighting ongoing concerns about sticky inflation, and emphasizing that the Fed still has “work to do” to achieve its price stability objectives.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +0.85% (weekly) & +13.60% (YTD), closing at 26,402
• S&P 500: +0.49% (weekly) & +12.65% (YTD), ending at 7,712
• Dow Jones Industrial Average: +0.53% (weekly) & +11.44% (YTD), closing at 53,560
• Russell 2000: -1.51% (weekly) & +19.76% (YTD), ending at 2,972

Oil Market

Crude oil prices declined during the week, as easing geopolitical tensions reduced risk premiums. Investor sentiment improved following discussions of a potential Iran-Oman shipping corridor and indications that the U.S. may favor economic sanctions over military escalation. As a result, Brent crude fell $5.08, or 5.4%, to $89.31 per barrel, while WTI crude declined $3.66, or 4.2%, to $83.40 per barrel.

Treasury Market

Treasury yields steepened during the week, with short- and intermediate-term yields moving higher while long-term yields declined. The shift was driven largely by increased expectations of additional Fed tightening following Fed Chair Kevin Warsh’s hawkish remarks at the Jackson Hole Economic Symposium on Friday. As a result, on Friday, the 2-year Treasury yield, which is highly sensitive to near-term Fed policy expectations, jumped 14 basis points to 4.34%, while the 10-year Treasury yield rose 6 basis points.

Key Treasury Yield Movements:

• 2-year yield: 4.34% (+0.10%)
• 5-year yield: 4.48% (+0.05%)
• 10-year yield: 4.73% (-0.01%)

As shown in the table below, compared to August 21, the Treasury forward curve shows a clear bear-steepening at the front end, with 3-year Treasury forward rates rising 6 to 9 basis points across the curve, while 5-year forward rates increased more modestly by about 2 to 5 basis points. In contrast, 7-year forward rates were largely unchanged, with spot rates up only 1.9 basis points and forward rates beyond August declining slightly by 0.2 to 0.3 basis points.

This shift suggests markets became more concerned about near-term rates remaining higher for longer, pushing up short- and intermediate-term rate expectations, while longer-term rate expectations remained relatively stable. As a result, the spread between 3-year and 7-year forward rates narrowed meaningfully, reflecting a flatter forward curve and a reduced expectation of significant rate increase further out on the curve.

Rate Expectations

A week ago, markets were pricing in a single 25-basis-point rate hike in December 2026, along with more than an 80% probability of an additional 25-basis-point hike by September 2027. This week, however, expectations shifted in a more hawkish direction, driven largely by Fed Chair Kevin Warsh’s remarks at Jackson Hole. Markets now fully price in two 25-basis-point rate hikes occurring earlier than previously expected, in October 2026 and March 2027. In addition, the implied probability of a 25-basis-point rate hike at the September meeting increased to approximately 60%, up from 40% a week ago. Beyond March 2027, markets are assigning a 30% to 40% probability of a third 25-basis-point rate hike at various points during the remainder of the year.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

For a visual representation of this week’s economic review, you can view or download the slide deck here:08.28.2026 CBC Weekly Economic Update Presentation Slides

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Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

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