The latest economic indicators continue to suggest a general slowdown in the economy, with unemployment claims falling slightly, but consumers, nevertheless, remain concerned over the labor market and their income growth. On this Labor Day holiday when we pay tribute to the contributions and achievement of American workers, these trends underscore the ongoing challenges and uncertainties faced by the workforce. Despite some positive signs, such as a decline in mortgage delinquencies, the overall outlook implies that the pace of new rehiring may remain slow, and economic headwinds could continue to impact consumer sentiment and housing market activity.

Jobless claims fall but remain in tight range: Fewer workers filed for new unemployment insurance claims in late August but nearly two million remained unemployed, according to the latest jobless claims report released by the U.S. Department of Labor. For the week ending August 19, initial claims for unemployment benefits declined 5k to 229k, an improvement from the prior week after reaching the highest level in two months. At the state level, initial filings for unemployment in California increased on a week-over-week basis, with new jobless claims rising to 38,190 from 38,115 recorded in the week before. Meanwhile, continuing claims also declined in the week ending August 16, with seasonally adjusted insured unemployment falling 7k to 1.954 million. The latest reading staying near the 3 ½ year high attained in mid-June, however, suggests that the pace of new rehiring could continue to be slow even as new layoffs remain subdue.

Consumer confidence eases in August, erasing some gains from the prior month: Americans felt slightly less confident in August compared to a month ago, as worries about a weakening job market and concerns over income growth continued to drive down sentiment despite stronger views of current and future business conditions. According to the latest report from the Conference Board, the U.S. consumer confidence index declined 1.3 points last month to 97.4 from the revised 98.7 in July. The pullback was driven by dips in both the consumers’ current assessment of and their short-term expectations on business and labor market conditions. Consumers remained concerned about the job market outlook in August, as 26.8% expected fewer jobs to be available in the next six months, compared to 25.1% in July. They were also less positive about their income outlook, with 12.6% expecting their income to decrease, an upward movement from 11.8% from the prior month. The share of consumers who believed interest rates would rise also inched up to 54% from 53.1% in July, but those who planned to purchase a home stabilized after declining in July.

New home sales dip as homebuyers remain on the sideline: Sales of new U.S. single-family homes fell slightly by 0.6% month-over-month in July after a sharp upward revision in June. The decline to 652k units came in higher than the consensus expectations of 630k units nevertheless but remained below the year-ago level by 8.2%. Sales activity decreased from the prior month in the Mid-west (-6.6%) and the South (-3.5%), unchanged in the North-east (0%) but up solidly in the West (+11.7%). With mortgage rates down 25 basis points (bps) since the beginning of August, the drop in borrowing costs could motivate some homebuyers to reenter the market. As such, sales activity on new housing units could see a slight pickup in August and September. Macro headwinds, however, will continue to weigh on new home sales for the rest of the year. New houses for sale, meanwhile, inched down to 499k and dropped for the third time in four months. At the current sales pace, it would take 9.2 months to clear the inventory if no new housing units were added. Despite the monthly decline in new home listings, inventory remained well above last year’s 7.9 months and will continue to be a challenge for builders in the near term.

Mortgage delinquencies decline but foreclosure activity edges up: Mortgage delinquency rate in July dipped and remained well below the pre-pandemic level, according to the latest release on delinquencies from Intercontinental Exchange (ICE). Mortgages that were late in payment by at least 30 days or more fell by eight basis points (bps) to 3.27% in July and were down nine bps from the same month of last year. The national delinquency rate was 58 bps below where it was before the onset of the pandemic in 2020. Foreclosure starts, on the other hand, increased 4.3% month-over-month to 32k and jumped 7.61% from July 2024. Foreclosure sales also increased 9.68% from June and surged 25% year-over-year to 6.9k. Foreclosure sales have been up from the year-ago level in each of the past five months, while foreclosure starts have been climbing annually for eight consecutive months. Despite the increases, the U.S. foreclosure rate remains 35% below pre-pandemic norms. California was ranked one of the bottom five states by non-current percentage, with a delinquency rate of 2.16% last month, a decrease from 2.21% in February 2024. With mortgage rates expected to ease slightly before the end of the year and the probability of a recession remaining low in 2025 and 2026, mortgage delinquencies should stay low throughout the next 18 months.

Fed’s preferred inflation gauge inches up again: The personal consumption expenditure price index (PCE) – the Fed’s favorite inflation indicator – increased 0.2% on a month-over-month basis in July and was up 2.6% from a year ago, according to the Department of Commerce. Excluding food and energy, the core PCE recorded a 2.9% year-over-year increase and reached the highest level since February. The moderate increase in overall prices was driven mostly by cost of services as service inflation climbed 0.3%, the highest since February. More tariff-induced price growth is expected to surface in the months ahead as businesses begin to slowly pass on some of the import duties to consumers. With the latest PCE inflation data mostly in line with expectations, mortgage rates were unchanged and remained at the lowest level since October 2024 after the release.

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In July, the U.S. housing market showed signs of weakness as California home sales and prices softened further. Pending sales also fell sharply, while inventory climbed to their highest level in nearly six years, as high mortgage rates and economic uncertainty continued to linger on. Nationally, housing starts surprised to the upside but permits continued to decline, pointing to ongoing slowdown in single-family construction, despite multifamily demand remaining resilient. Buyers’ caution was also evident in the record-high share of canceled contracts, while fix-and-flip investors scaled back amid rising costs, labor shortages, and slowing price appreciation. Against this backdrop, Federal Reserve Chair Powell signaled that a September rate cut is likely as the central bank could begin to shift its focus back to job growth, since labor market risks appear to be rising.

California Housing Market Cools in July as Sales Slide, Prices Dip, and Inventory Hits Six-Year High: California’s housing market weakened in July as sales fell both month-over-month and year-over-year, marking the fourth straight annual decline and pushing year-to-date activity into negative territory for the first time in six months. Elevated mortgage rates and economic uncertainty kept many buyers on the sidelines, while pending sales registered their sharpest annual drop since late 2023. The statewide median home price slipped year-over-year for the third straight month to a five-month low, despite seeing price gains persisted in many counties across the state. On the supply side, active listings continued to increase from the year-ago level for the 17th consecutive month, reaching their highest level in nearly six years. While broad-based growth continued to be observed in almost every county, the pace of increase in inventory has begun to slow in recent months. Overall, the market reflects an ongoing pullback in demand as high borrowing costs and economic uncertainty continue to keep buyers on the sideline.

Housing Starts Jump in July, but Falling Permits Signal Ongoing Weakness in Single-Family Construction: In July, U.S. housing starts jumped unexpectedly, but a continued decline in building permits pointed to ongoing weakness in residential construction, especially in the single-family sector. Single-family starts rose 2.8% but remained down year-to-date, with regional growth concentrated in the South. Permits have been trending lower since February and could pull back further in the months ahead as builders remain cautious about the current home building environment. Builder sentiment worsened in August, as the NAHB Housing Market Index fell nearly to its lowest level in over a decade (outside the pandemic era), as housing affordability and soft demand remain ongoing concerns for developers. Meanwhile, multifamily construction has gained momentum, with starts up nearly 19% year-to-date, supported by strong rental demand amid high homeownership costs. Although multifamily permits dipped in July, the overall trend remains stable, particularly in the South and Midwest, where developers continue to respond to demand for apartments.

Home-Purchase Cancellations Hit Record High for a July as Buyers Pull Back amid Rising Costs and Uncertainty: In July 2025, about 58,000 U.S. home-purchase contracts – or 15.3% of pending sales – were cancelled, according to a study published by Redfin. The cancellation rate last month was the highest on record for a July going back to at least 2017. The increase in the number of home purchases falling through reflects buyers’ hesitation amid elevated mortgage rates, high home prices, and market/economic uncertainty, as many buyers exercise contingencies or seek better deals. Cancellations were most pronounced in high-growth markets such as San Antonio, Fort Lauderdale, and Jacksonville, while more stable areas like New York and Seattle saw far fewer terminations. A few of the major metros in California that experienced increases in cancellations from a year ago include Los Angeles (16.5%), Riverside (19.5%), and San Diego (16.1%). Sacramento (14.3%), on the other hand, was one of the 11 metros that fell in cancellations year-over-year. The trend underscores a “buyer’s market” dynamic, where affordability challenges and cautious sentiment are keeping demand restrained before mortgage rates started declining in recent weeks.

Fix-and-Flip Investors Retreat as Rising Costs, Labor Shortages, and Slowing Home Prices Erode Market Momentum: In the second quarter of 2025, fix‑and‑flip activity slowed notably as developers faced mounting cost pressures and labor shortages, according to an index from John Burns Research and Consulting and Kiavi, a lender focused on the real estate investor. Investor sentiment fell, with only 30% reporting “good” sales – down from 38% a year prior, prompting many professional flippers to scale back deal volume even as ROI margins held steady near 30%. Regions like Florida, Northern California, and the Southwest experienced the greatest headwinds due to elevated insurance costs, competition from homebuilders, and cooling home price appreciation.

Powell Signals September Rate Cut as Fed Balances Persistent Inflation with Rising Labor Market Risks: Federal Reserve Chair Jerome Powell signaled that monetary policy easing is likely to take place in September, citing a shifting balance of risks between persistent inflation and a softening labor market. While inflation pressures remain elevated due partly to tariffs, Powell believed with more confidence now that these effects could be transitory. He noted that while unemployment remains stable, downside risks to employment are increasing, which requires the Fed to shift its focus back to maximizing sustainable employment. With policy still restrictive but closer to neutral than a year ago, Powell reiterated that the upcoming decisions will be data-dependent and stressed that the Fed will adjust carefully to evolving economic conditions rather than follow a preset course. Following Powell’s speech at Jackson Hole, mortgage rates posted their biggest drop since August 1, slipping to the lowest level since October 3, 2024, according to Mortgage News Daily.

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Inflation continued to rise, with both consumer and wholesale prices experiencing increases in July, indicating that the inflation threat is far from over. Despite this ongoing macroeconomic concern, retail sales have shown resilience, bolstered by events like Amazon’s Prime Day and strong demand in certain categories. Small business optimism has also climbed back above 100 and remained above the 52-year average, driven by better business conditions and legislative changes, despite ongoing uncertainty and inflation concerns. Meanwhile, California’s housing affordability remains near its cyclical low, with a slight improvement from the previous year but a decline from the prior quarter.

California housing affordability remains near its cyclical low in second-quarter 2025: Housing affordability in California dropped from the prior quarter but improved from the same quarter of last year. The statewide housing affordability index (HAI) for existing single-family homes fell two percentage points (pp) from Q125 to 15% in Q225 but inched up from its year-ago level by 1 pp. A minimum annual income of $232,400 was required to make the monthly payment of $5,810, including principal, interest, and taxes (PITI) on a 30-year fixed-rate mortgage at 6.90% in California. The minimum income required in Q225 was $4,400 less than the record high reported in Q224. Compared to a year ago, affordability improved in 41 counties but declined in four and showed no improvement in eight. Mortgage rates, while dipping below the levels of the previous quarter and of the same quarter of last year, continued to stay elevated and kept borrowing costs near their all-time highs, which was the primary reason for why affordability remained near its cyclical low. With rates expected to show more fluctuations in Q325, housing affordability may not change much in the current quarter.

Inflation remains on the rise: The headline Inflation figure held steady in July and was mostly in line with economists’ expectations. The Consumer Price Index (CPI) was up 0.2% from June as both food and energy prices moderated and increased 2.7% on a year-over-year basis. Excluding energy and food, core CPI registered a year-over-year gain of 3.1% last month and reached the highest level since February. While new vehicle prices remained flat from the prior month, tariff-sensitive items such as footwear and household furnishings saw sharp price hikes in July. Core services’ inflation picked up a stronger than expected 0.4% last month, with airline fares rising 4% while medical care and transportation services also posted solid gains. The producer price index (PPI) that reflects wholesale inflation measure also heated up last month, with both the headline and the core indices jumping 0.9% on the month, surpassing the Dow Jones estimate for a 0.2% gain. The latest reports on consumer prices and wholesales prices imply that the inflation threat is far from over and the effects of tariffs will likely continue to put upward pressure on prices in the remaining months of 2025.

July retail sales get help from Prime Day: Consumers spending continued to show strength after a dramatic drop in spring. After dipping 0.8% month-over-month in May, U.S. retail sales increased another 0.5% in July after a revised 0.9% gain in June, matching the consensus expectations polled by the Wall Street Journal. The increase was driven in part by a solid growth in demand for auto sales (+1.6%), but a 1.4% sales gain in furniture stores, and a 0.8% gain in sales at sporting goods stores also boosted the overall retail sales last month. Sales in the latter two categories, however, are tariff-sensitive and the stronger dollar sales volume could just be a reflection of higher prices rather than more units being bought. Amazon’s first four-day Prime-Day sales last month also could be a factor that pushed up sales more than normal as the sales event typically lasted only two days in the past. The firmer sales growth last month, nevertheless, suggests that American consumers are still spending, but they will remain price conscious and choosy as firms slowly pass costs on to them.

Small business optimism climbs back above 100: The NFIB Small Business Optimism Index increased 1.7 points in July to 100.3, after remaining virtually flat in the prior month. The level of optimism for small business owners remained above the 52-year average of 98 as respondents who reported better business conditions jumped 14 points from June and reached a net 36% in July. The passing of the One Big Beautiful Bill in early July and stock market indices reaching record highs could be contributing factors to the boost in business owners’ confidence last month. Despite the improvement in overall optimism, level of uncertainty remained elevated with the uncertainty index surging eight points from June to 97 as tariffs and inflation concerns continued to linger on. While one in ten (11%) owners mentioned that inflation was their single most important problem in operating their business, the net percent of respondents raising average selling prices fell five points from June to a net 24%. A net 28% planned to increase prices in the next three months, a dip of 4 points from the prior month. The level remains well above its historical average though and suggests that continued inflation will remain in the months ahead.

“Lock-in effect” persists but is slowly getting better: In the first quarter of 2025, 81% of outstanding mortgage debt had interest rates below 6%, an increase of 4.4 percentage points from first quarter of 2024, according to a Realtor.com analysis based on data from the FHFA National Mortgage Database. One out of five (20.7%) of the outstanding mortgages were below 3%, one-third (32.7%) of them between 3% and 4%, another one-fifth (17.9%) between 4% and 5%, and one-tenth (9.9%) between 5% and 6%. With interest rates remaining elevated but homebuying activity continuing – albeit at a slower pace – the share of mortgages below 6% could fall closer to 75% by the end of 2025.

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