Wealth Insights

Economy Commentary

The Economy

Real GDP Growth: That Old Familiar Feeling?

September 2026

Revised and more complete source data leave Q2 real GDP growth at an annual rate of 1.5 percent, matching the original estimate from the Bureau of Economic Analysis (BEA), with some shuffling of the underlying details amounting to a wash in terms of the headline growth rate. Real consumer spending is now reported to have grown at an annual rate of 3.4 percent, up from the initial estimate of 3.2 percent. Much of that upward revision, however, reflects growth in spending on health care being revised meaningfully higher, while at the same time growth in spending on goods was revised downward. Growth in real business fixed investment was revised modestly higher, but this mainly reflects a smaller contraction in business spending on structures than initially estimated while real outlays on equipment and machinery grew at a slower pace than initially estimated. The revisions yield growth in real private domestic demand, combined business and residential fixed investment and consumer spending adjusted for price changes, of 4.2 percent on an annualized basis, up from the initial estimate of 3.9 percent, which is the fastest quarterly growth rate since Q1 2023.

Recall that last month we discussed the blistering pace of revenue growth in Q2. At that point BEA had not released their estimates of Q2 corporate profits, which came alongside their revised estimate of Q2 real GDP. Using the GDP measure most consistent with how profits are estimated in the S&P 500 measure shows before-tax corporate profits increased by 9.6 percent in Q2, with after-tax profits up 8.9 percent, yielding year-on-year increases of 29.4 percent and 28.2 percent, respectively. This leaves pre-tax profit margins at their widest since 1951 and after tax margins wider than at any point in the life of the GDP data. To be sure, robust revenue growth is in part a reflection of the pace at which prices have been rising over recent years, but healthy profit growth is freeing up cash that is, in turn, helping support business capital spending, with cap-ex growth extending beyond AI related investment.

One storyline which has gone largely unnoticed is that real GDP growth has settled back into the same trend rate that we all came to know but not necessarily love over the decade-plus prior to the onset of the pandemic. Which may help account for why this may not seem like much of a story given that two words routinely used, including by us, to describe the pace of growth over what was the longest U.S. economic expansion on record were “frustratingly slow.” Either way, over the past eight quarters, real GDP growth (measured as the year-on-year percentage change in not seasonally adjusted real GDP) has averaged 2.25 percent which, as you may recall, was the average pace of real GDP growth over the pre-pandemic expansion. We come neither to bury nor to praise 2.25 percent real GDP growth, though we could point to a few developed countries in which that pace of growth would feel like living in the fast lane. We could also point out that sustaining a steady pace of growth in light of the various shocks the economy has been subjected to over the past few years is quite an accomplishment.

Clearly, though, not all segments of the economy are moving in the same direction, let alone at the same pace, with the net result being that the economy almost seems destined for real GDP growth at or around that 2.25 percent pace. One reason so much attention is given to AI investment is that AI holds the potential to shift the trend rate of economic growth into a higher gear while pushing down the trend rate of inflation by fueling faster labor productivity growth. The reality, however, is that as we sit here today, no one knows for sure when those benefits will come or the magnitudes to which growth and inflation will be impacted, and many question whether the massive sums being directed toward AI investment will ultimately yield an adequate return. We are in the camp that believes AI will ultimately foster a faster sustained rate of productivity growth which, in turn, will boost real GDP growth while pushing the rate of inflation lower. Until then, real GDP growth is likely to bounce along at a rate not too different, in either direction, from the longer-term trend rate of 2.25 percent.

After hitting a more than four-year high in July, the Institute for Supply Management’s (ISM) index of manufacturing sector activity settled back a bit in August. At 54.6 percent, however, the headline index showed an eighth straight month of expansion, and over this span growth has become more broadly based across the factory sector with fifteen of the eighteen industry groups included in the ISM’s survey indicating growth in August. Order books continue to expand at a healthy clip which, along with still-expanding backlogs of unfilled orders, suggests continued growth in employment and output in the factory sector over coming months. One potential red flag, however, is that comments from survey respondents were far less upbeat on continued orders growth than had been the case over the prior several months, reflecting concerns over renewed hostilities in the Middle East and renewed salvos in trade battles amid the latest spat between the U.S. and Canada.

At the same time, the ISM’s survey continues to show persistent and broadly based upward pressure on input prices, with the prices paid index now having been above seventy percent for seven straight months. The story is much the same in the broad services sector. The ISM Non-Manufacturing Index rose to 55.4 percent in August, indicating ongoing expansion, and order books continue to grow while backlogs of unfilled orders continue to build, suggesting continued expansion in the services sector in the months ahead. Unfortunately, the story is also much the same when it comes to input prices, with the prices paid index in the ISM Non-Manufacturing Index also showing persistent and broadly based upward pressure on input prices. At a time when inflation remains firmly above the FOMC’s two percent target rate, the ISM’s monthly surveys show little relief from the early-stage price pressures that ultimately work their way into the broader inflation measures.

Total nonfarm payrolls rose by 162,000 jobs in August, handily topping our forecast of 121,000 jobs and blowing past the consensus forecast of 55,000 jobs. At the same time, prior estimates of job growth in June and July were revised up by a net 55,000 jobs for the two-month period. Job growth was notably broad based in August, with the one-month hiring diffusion index, a measure of the breadth of job growth across private sector industry groups, jumping to 55.6 percent – you have to go back to January 2024 to find a higher reading. Aggregate private sector wage and salary earnings rose by 0.7 percent in August, leaving them up 4.3 percent year-on-year. While the labor force participation rate ticked up by two-tenths of a point, the unemployment rate held at 4.1 percent as there was a similarly large increase in household employment. The broader U6 measure, which also accounts for underemployment, fell to 7.7 percent in August from 7.9 percent in July, largely owing to a sharp drop in the number of those working part-time for economic reasons.

Upon reading the preceding paragraph, you might be tempted to ask, “what’s not to like?” about the August employment report, to which our answer would be “plenty.” For starters, payrolls in leisure and hospitality services are reported to have risen by 62,000 jobs in August, with local government payrolls up by 50,000 jobs, accounting for a large chunk of the increase in total nonfarm payrolls. If these two industry groups sound familiar, they should, as we’ve routinely flagged them as primary sources of the seasonal adjustment noise that has plagued the monthly estimates of nonfarm job growth. Aside from being heavily concentrated amongst these two industry groups, August’s increase in nonfarm payrolls follows a net increase of just 52,000 jobs over the prior two months.

That the monthly estimates of job growth have been so volatile and so riddled with seasonal adjustment noise has only increased our reliance on the longer-term trends in the not seasonally adjusted data, and on that basis job growth has been notably stable, even if not all inspiring. For instance, the unadjusted data show over the most recent twelve months nonfarm payrolls have increased by an average of just over 57,000 jobs per month, in line with the average pace that has prevailed since early-2025. While this pace is far below the pre-pandemic trend pace of job growth, it is nonetheless more than sufficient to keep the unemployment rate steady given a barely growing labor force. To that point, the unemployment rate held at 4.1 percent in August.

With a “low hire-low fire” labor market having largely stabilized, inflation is the main focus of the FOMC, yet the Committee remains sharply divided heading into this month’s meeting. The FOMC’s dilemma: inflation remains stuck well above their target rate but is being mostly sustained by supply side factors beyond their reach. The recent run-up in longer-term market interest rates is in part a reflection of market participants’ concerns that the FOMC has fallen behind the curve and will, at some point, have to rush to catch up. As such, while we do not expect a Fed funds rate hike at this month’s meeting, neither would we be surprised by one.

Source: Bureau of Economic Analysis; Institute for Supply Management; Bureau of Labor Statistics

As of September 11, 2026