Forex Factory News: How August Retail Sales Surprised the U.S Economy with Q4 Expectation

The month of August 2025 has become more interesting than most people had imagined to the U.S. economy. Retail sales increased in August despite increasing tariffs, inflation concerns and indications of labor market cooling. Still, the strength of the late-summer becomes questionable: how long can it last, and what will the next quarter will bring? To give a more complete picture I draw in further information – on inflation, employment, Fed policy (Forex Factory News).

Table of Contents

What We Know So Far: August in Context

Retail sales increased 0.6% two months on two months in August, the same increase as July. Even the core sales (autos, gas, etc. excluded) increased further (~0.7%).
The inflation is slowly increasing: overall CPI increased to 2.9% year-on-year, which was 2.7% in July. The core inflation (without food and energy) stands at 3.1 per annum.
The employment market is becoming soft In August, it added around 22,000 jobs, which is considerably lower than what many people expected. The rate of unemployment increased to 4.3, which is close to the four years high.
There are also early jobless claims which are at the highest levels not seen in a number of years.

Thus, it is a mixed picture, the consumers are purchasing, the prices are increasing, but the labor aspect is becoming weaker.

Going into Q4: Major Trends and Risks

Following are the current trend projections of the Q4, as per the latest data. These are not confirm, but are plausible situations to consider.

1. Inflation Pressure and Passing of Prices

Inflation has not been as low as some people would have wished since it is at 2.9 and core is approximately at 3.1.
Tariffs are adding to the cost pressures either through importation expenses or through increased tariffs being pre-emptively purchased by businesses before the costs increase. This has the propensity of driving inflation.
The Cleveland Fed estimates in its nowcasting reveal that the Q3 inflation is performing at high levels (CPI, core CPI, PCE etc.).

Q4 implication: The inflation may remain same or even increase further providing new tariff rounds become effective or cost pressures (labor, shipping, energy) arise. It would lower the margin of error among consumers and squeeze the real incomes.

2. Labor Market Softening

The growth in jobs is decelerating at a high rate; updates in previous months have revealed that the months were not as good as initially assumed.
Unemployment rate rising to 4.3%. That is still moderate that is not recession level but felt by businesses and households.
The vacancies are still relatively high, yet the recruitment is more conservative. Companies do not seem to be willing to grow payrolls vigorously.

Implication to Q4: The wage growth will be slower, new jobs will be reduced, and probably, there will be more layoffs or layoff freezes. As labor income growth will be weaker, consumer spending can be weakened, particularly on discretionary goods.

3. Consumer Strength versus Discretionary Pullback

To date, expenditures on necessities (food, groceries, restaurants) and on some items such as automobiles, electronics, etc., are performing well. But furniture, home furnishings, high end discretionary products are faltering.
Once the price increases, people are likely to reduce expenditure on products that are a necessity and reduce consumption of nice to have items first.

Implication on Q4: We could have a polarization of the retail world: the industries addressing necessities or lower/range discretionary goods could perform alright; the higher-end, luxury, nonessentials could experience stronger slowdown.

4. Federal Reserve Policy and interest rates

The Fed is in a classic dilemma as inflation is increasing, and the labor markets have been on the decline. Prematurely reducing rates may trigger inflation; it may be an excessive time to maintain the rates unchanged and stimulate growth.
The markets are looking forward to a cut of at least one rate in September or any time in the near future. However, several analysts are convinced that the Fed will continue to be conservative and data-driven.
The forecast of Vanguard (e.g.) projects the unemployment to increase to 4.5% by the end of the year.

Implication to Q4: The probability is slight easing (25 bps reduction, probably in September or Q4), but not vigorous. In case inflation remains high or some unexpected shocks occur (energy costs, supply chain, and so on), the Fed might postpone the decrease or even express concern.

5. Growth & GDP Forecasts

The models such as GDP Now are projecting a Q3 growth of approximately 3.4 per cent (on an annualized basis), which is more healthy than most people had imagined in several months back.
Nevertheless, numerous predictors believe that the growth will decelerate due to the burden of tariffs, inflation and weaker labor market. Higher tariffs put pressure on the GDP growth in H2 2025 as well as 2026, according to the Conference Board.

Implication of Q4: Q4 is expected to be a small growth. We could be experiencing a slower pace of GDP growth particularly when consumer spending becomes sluggish. The positive element is whether the consumers draw into the savings, or there is stimulus or relaxing by the Fed.

What It Implicates on Traders and Observers (Especially on the “Forex Factory” etc.)

Because the keyword Forex Factory implies that one would like to see implications of the forex/financial market, the following is what the currency traders, bond investors, etc. should monitor:

Greenback reaction: When inflation remains high and the Fed is hawkish (late cuts) there is a likelihood of the USD remaining strong or even growing stronger. However, should inflation indicate that it is cooling down and the Fed switches gears to the cuts, then that would undermine the USD.
Yield curve and bond markets: Stagnating job growth and the potential reduction of Fed would further flatten or invert sections of the yield curve. In the event of a slowed growth, safe assets (treasuries) can be even more appealing.
FX volatility due to policy uncertainty: Tariffs, changes in trade policy, updated labor statistics and so on are the fuel. Surprises in the inflations or employment report are likely to cause a dramatic response on the forex markets.
The currencies of commodities (AUD, CAD, etc.) will experience inflation, energy and trade pressures as well. In case the world demand decelerates, or the cost of the inputs increases, such currencies will be unstable.

Q4 Outlook

Summing it all up, the way I perceive Q4 will be is as follows:

The growth in retail sales will slow down, particularly in the discretionary category. Cost pressures (tariffs, inflation) will begin to consume real incomes, and consumers will begin tightening budgets.
The inflation will be persistent, perhaps rising by even a little and then slowly declining particularly on rents, food and imported goods.
Labor market will be softening further. There could be tens of thousands of jobs added each month, as opposed to hundreds of thousands. Unemployment can creep even further.
Fed may reduce rates a bit, perhaps by one 25 bps reduction in the fourth quarter (unless in September), but will be hesitant to indicate several moves until the trends are definitely negative on inflation.
GDP growth will moderate. The third quarter will be slightly strong but the fourth quarter will be harder. The growth may ease down to near or less than 2% depending on the steepness of the decline of consumer spending and investment.

Conclusion

The retail figures of August were a shocker: consumer spending performed better than most people thought it would under tariffs and price increases. However, once you add that to sluggish job creation, an increase in the number of jobless claims, and inflation that is slow to react to, the remainder of the year is looking a little slower.

The next several months will be the critical ones to those who pay close attention to economic data (particularly through such websites as Forex factory and so on). Look at CPI/ Core CPI, unemployment/ job-creation statistics, Federal statements, and sector performance (discretionary vs essentials). That will answer the question of whether the late-summer resiliency is sufficient to push the economy through or whether Q4 will be a more tumultuous period.