August in Review
The U.S. imposed a new 50% tariff on Canada. However, it covers only 5% of imports from Canada and 1% of total U.S. imports, so despite the high tariff rate, the economic impact is likely to be modest. Canada responded with a retaliatory tariff beginning September 8, and the U.S. then escalated with more tariffs starting January 1. Trade tensions between the two countries are rising, increasing the risk of a prolonged dispute.
Canada is one of the few countries, alongside China, that has retaliated. This is unique historically. In prior eras, escalation was much more common across nations, making the 2025 trade war unusual. Aside from Canada and China, most countries chose to negotiate in 2025 rather than retaliate, which is a key reason tariffs were less harmful to the economy than expected.
Consumer inflation remained elevated in July, although it cooled slightly. Energy continues to be a major source of inflation pressure. At the same time, underlying inflation excluding food and energy has moderated and returned to levels seen earlier in the year, suggesting higher energy costs have not yet influenced consumer prices in other parts of the economy.
Consumer spending slowed in July but remained healthy. The slowdown was driven largely by weaker goods spending, particularly durable goods, while spending on services continued to grow at a steady pace. At the same time, household income growth lagged spending, and inflation continued to erode purchasing power. The national savings rate remains well below its historical average, suggesting some households continue to face financial pressure.
Construction spending was broadly unchanged in June, with residential activity edging lower and nonresidential spending moving slightly higher. Data centers remained the strongest segment, posting rapid growth. Spending on data center projects now exceeds many other construction categories, and U.S. technology companies continue to plan additional investment. However, construction activity is becoming increasingly concentrated in this segment, creating risks if demand weakens. Potential constraints include the availability of AI chips, power infrastructure, specialized construction talent, and a small but growing community opposition to data centers.
U.S. manufacturing continues to gain momentum, with shipments rising at a strong pace in July. Durable goods shipments, which include products with long lifespans, posted solid gains that were led by metals, machinery, and motor vehicles & parts. Investments in AI and technology remain a major source of economic growth, and manufacturing industries tied to those trends continue to do well. Consumer-oriented manufacturing industries expanded more slowly, including textiles, food, and furniture. Manufacturing employment is beginning to improve after several years of declines.
Corporate profits reached a record level in the second quarter, increasing at a double-digit rate. Profit growth accelerated during 2026 after several years of modest gains, driven by software and tech, banking and finance, and a recovery in manufacturing profitability following weakness last year. Strong profit growth has helped fund business investment, including the AI data center buildout. Higher profits also support business-to-business industries such as law, consulting, marketing, and software, as corporations often increase spending on professional services and products when profitability improves.
The conflict between Iran and the United States remains stuck in a prolonged stalemate. Diplomatic efforts have once again broken down, and a temporary ceasefire reached earlier this summer expired without being renewed. Iran continues to hold considerable influence over the Strait of Hormuz, a critical shipping route for global energy markets, while commercial vessel traffic remains constrained and U.S. restrictions on Iranian ports stay in place.
Following months of military conflict, The U.S. implemented new sanctions on Iran's economy. Although sanctions have changed over time, the U.S. has maintained sanctions on Iran for most of the past 50 years. The new measures represent an escalation because they target Iran's economy directly while also seeking to penalize other nations that continue to do business with Iran. It remains unclear how effective these sanctions will be or whether they will alter the broader conflict.
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