Recent U.S. economic data are presenting a mixed picture, according to analysts at Barclays. While demand appeared weaker toward the end of last year, early indicators for 2026 suggest the economy remains relatively resilient. However, persistent inflation pressures are likely to keep the Federal Reserve cautious about lowering interest rates.
Barclays noted that economic growth slowed at the start of the year, although strong household income and stable labor market conditions continue to support consumer spending.
In a research note, Barclays economists led by Pooja Sriram said recent data points to softer demand during the fourth quarter, while stronger income growth in January indicates that economic activity remains resilient.
Revised figures showed that U.S. GDP growth for the fourth quarter was adjusted lower to an annualized rate of 0.7%, reflecting weaker consumer spending and reduced business investment. Consumer spending growth was revised down to 2.0%, while private domestic final purchases were lowered to 1.9%.
Despite these weaker demand indicators, income data offered a more positive outlook. Updated labor income figures increased third-quarter gross domestic income growth to 3.5%, while disposable personal income rose 0.9% month-on-month in January.
Consumer spending also showed signs of stability. Real personal consumption increased 0.1% in January, marking the second consecutive month of growth after adjusting for inflation. The figures suggest that consumer spending remains largely in line with income growth trends.
Labor market conditions also remain strong. Job openings rose to approximately 6.95 million in January, while the hiring rate held steady, signaling continued demand for workers across the economy.
However, inflation remains a major concern for policymakers. Barclays economists pointed out that while consumer price index (CPI) data appeared relatively moderate, the core Personal Consumption Expenditures (PCE) index, which is the Federal Reserve’s preferred inflation gauge, continues to show stronger underlying inflation pressures.
Core CPI rose 0.22% month-on-month in February, but core PCE inflation reached close to 0.4% for the second consecutive month in January and is expected to record a similar reading for February.
Because of these persistent inflation pressures, Barclays expects the Federal Open Market Committee (FOMC) to keep interest rates unchanged at its upcoming policy meeting. Policymakers are likely to wait for clearer signs that inflation is moving back toward the Fed’s 2% target.
Barclays has also revised its interest rate outlook. The bank now expects only one 25-basis-point rate cut in 2026, likely in September, compared with its previous forecast of a June cut. A second rate cut is now projected for March 2027.
The revised forecast reflects concerns about elevated core inflation, along with potential upside risks linked to higher oil prices and ongoing geopolitical tensions.
Barclays economists believe the Federal Reserve will require stronger evidence that inflation is easing before starting to lower interest rates. They expect Fed Chair Jerome Powell to emphasize that additional rate hikes are not the central scenario, while also reiterating that future rate cuts will depend on clearer signs that inflation is peaking or that the labor market begins to weaken.
