U.S. economic data are sending mixed signals, with softer demand at the end of last year but signs of resilience early in 2026, while persistent inflation is likely to keep the Federal Reserve cautious about easing policy, according to Barclays.
Get deeper policy outlook insight with InvestingPro The bank said incoming figures suggest growth slowed at the turn of the year, even as stronger household income and labor market indicators continue to support spending.
“Recent GDP and spending data suggest softer demand in Q4, but stronger income in January points to resilient activity,” Barclays economists led by Pooja Sriram said in a note.
Second estimates showed fourth-quarter U.S. GDP growth revised lower to 0.7% annualized, reflecting weaker consumer spending and business investment. Consumer spending growth was revised down to 2.0% annualized, while private domestic final purchases were cut to 1.9%.
Despite the softer demand picture, income data offered a more supportive signal for the outlook. Revised labor-income estimates boosted third-quarter gross domestic income growth to 3.5%, while disposable income rose 0.9% month-on-month in January.
Real personal spending increased 0.1% in January for a second consecutive month after inflation adjustments, suggesting consumption remains broadly aligned with income trends. At the same time, labor-market indicators remained firm, with job openings rising to about 6.95 million in January and the hiring rate holding steady.
Inflation dynamics remain a key challenge for policymakers, the economists argue. While consumer price index (CPI) data were relatively subdued, the core Personal Consumption Expenditures (PCE) - Fed’s preferred gauge - continues to show stronger underlying pressures.
“Core PCE inflation remains hot despite a soft CPI,” the economists said. Core CPI rose 0.22% month-on-month in February, but core PCE inflation printed close to 0.4% for a second consecutive month in January and is expected to post 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 waiting for clearer evidence that inflation is moving back toward the 2% target.
“We changed our Fed call to just one 25bp rate cut in 2026, in September (versus June previously), and postpone our second 25bp cut to March 2027," the economists wrote.
The delay reflects elevated core inflation and upside risks tied to higher oil prices and geopolitical uncertainty. Barclays expects the Fed will need additional evidence that underlying inflation is moderating before beginning to ease policy.
The economists expect Fed Chair Jerome Powell to stress that rate hikes are not the base case and reiterate that further cuts remain the central scenario, though easing would likely require clearer signs that inflation is peaking or that the labor market is weakening.
