US economic data is sending mixed signals, with weak demand at the end of last year but signs of resilience at the start of 2026, while persistent inflation is likely to keep the Federal Reserve cautious about easing monetary policy, according to Barclays.
The bank said the figures indicated slowing growth at the start of the year, even as indicators of household income and a stronger labor market continued to support spending.
Recent GDP and spending data point to weak demand in the fourth quarter, but stronger income in January suggests resilient activity, Barclays economists led by Pooja Sriram said in a note.
The second estimate showed that U.S. GDP growth in the fourth quarter was revised down to 0.7% year-on-year, reflecting weak consumer spending and business investment. Consumer spending growth was revised down to 2.0% year-on-year, while private domestic final purchases were lowered to 1.9%.
Despite the weaker demand picture, income data provided a more supportive signal for the outlook. Revised estimates of employment income boosted overall GDP growth in the third quarter to 3.5%, while disposable income rose 0.9% month-on-month in January.
Real personal spending rose 0.1% in January for the second consecutive month after adjusting for inflation, suggesting that consumption remains broadly in line with income trends. Meanwhile, labor market indicators remained strong, with job openings rising to around 6,950,000 in January and the employment rate holding steady.
Inflation dynamics remain a key challenge for policymakers, economists argue. While the Consumer Price Index (CPI) data has been relatively subdued, the core Personal Consumption Expenditures (PCE) price index—the Federal Reserve's preferred measure—continues to show stronger underlying pressures.
Core PCE inflation remains high despite a weak CPI, economists said. The core CPI rose 0.22% month-on-month in February, but core PCE inflation was close to 0.4% for the second consecutive month in January and is expected to register a similar reading for February.
As such, Barclays expects the Federal Open Market Committee (FOMC) to leave interest rates unchanged at next week's meeting, with policymakers awaiting clearer evidence that inflation is moving back towards the 2% target.
We have changed our forecast for the Federal Reserve to just one 25-basis-point rate cut in 2026, in September (as opposed to June previously), and are postponing our second 25-basis-point cut to March 2027, the economists wrote.
The delay reflects high core inflation and the upside risks associated with rising oil prices and geopolitical uncertainty. Barclays expects the Federal Reserve will need further evidence that core inflation is declining before beginning to ease policy.
Economists expect Federal Reserve Chairman Jerome Powell to confirm that raising interest rates is not the baseline scenario and reiterate that further cuts remain the central scenario, although easing will likely require clearer signs that inflation is peaking or the labor market is weakening.
