Leading Indicator Turns Positive

A key gauge of future U.S. economic activity rose in July for the first time in four years, according to The Conference Board. The improvement was driven by firmer credit markets, rising stock prices, gains in new orders for manufactured goods, and other data pointing to stronger demand.

The Leading Economic Index (LEI) increased 0.2% in July, recovering from a 0.1% decline in June. More notably, the LEI's six-month growth rate edged up 0.2% after falling 1.3% during the previous six months—the first positive reading since 2022.

The only component to decline last month was consumer expectations for business conditions, which continued to weigh on the overall index, The Conference Board said.

Moderate Growth Ahead

Justyna Zabinska-La Monica, senior manager for business cycle indicators at The Conference Board, said the rebound in the six-month LEI growth rate suggests "moderate growth ahead." She added, "The economy should keep expanding," while cautioning that consumer expectations "continued to be a notable drag on the overall index."

GDP Outlook and Drivers

The Conference Board projects gross domestic product will grow 1.9% in both 2026 and 2027, a slowdown from the 2.1% pace recorded last year, according to data from the Bureau of Economic Analysis. GDP expanded at an annual rate of 1.5% in the second quarter, down from 2.1% in the first three months of the year.

Zabinska-La Monica noted that growth will likely be supported by business investments in artificial intelligence, while higher living costs may dampen consumer spending, particularly among lower- and middle-income households.

Estimates for U.S. business investment in AI this year range from $280 billion to $581 billion, depending on which categories of AI software, services, and infrastructure are included in calculations, according to sources including the Atlanta Fed and Goldman Sachs.

Manufacturing Supports Output

Manufacturing is also contributing to GDP gains. The Federal Reserve reported Tuesday that output grew at a steady pace last month, as production of computers, machinery, and other business equipment offset slowdowns in categories such as motor vehicles and clothing. Both manufacturing and total industrial production expanded 0.2% in July after 0.3% growth in June. Over the 12 months through July, total industrial production rose 1.1%.

Consumer Weakness Persists

Gloomy consumer expectations may slow GDP growth in the coming months, Zabinska-La Monica warned. "The higher cost of living may reduce consumer spending, especially by lower- and middle-income households," she said.

Consumer sentiment fell 8% this month after two straight months of improvement, according to Joanne Hsu, director for surveys of consumers at the University of Michigan. "Large reductions were seen among older consumers, lower-income consumers and those without a college degree," Hsu said on Aug. 14. Consumer expectations for business conditions dropped 11% for the short run and 17% for the long run, she added.

Households also trimmed spending at auto dealerships, furniture stores, restaurants, and other retailers. Retail sales in July fell 0.6%, well short of forecasts, after a 0.2% increase in June, the Census Bureau reported on Aug. 14. Sales at gas stations and auto dealers decreased 0.9% and 2%, respectively, with lower gas sales reflecting cheaper prices at the pump. Even excluding those two volatile categories, retail sales declined.