September’s data offer further evidence of a resilient but uneven economy. Modest shifts in labor market conditions and manufacturing and service-sector activity suggest the economy is still holding firm, even as persistent inflation concerns cloud the outlook.
Consumer resilience has been a pillar of the economy in recent years. Yet, elevated diesel and gasoline prices that consumers see every day are a threat to consumer and business confidence and weigh heavily on consumer budgets, contributing to persistent concerns about inflation and affordability. Not surprisingly, respondents to the University of Michigan Consumer Sentiment Survey cited higher fuel prices and broader inflation pressures as key reasons for growing pessimism, with the survey’s October consumer sentiment reading declined for the third consecutive month. That has spurred state fuel tax rollbacks and the federal excise tax suspension for diesel, which are modestly helping to ease some of the pressure at the pump.
Inflation concerns also appeared in the latest ISM Services report, which showed activity slowing in September, while price pressures climbed to their highest level in four years. Several service-sector subcomponents softened during the month, pointing to a slower pace of growth across portions of the economy. Softer activity and rising costs highlight an expanding economy but one that faces ongoing inflationary pressures. The manufacturing sector showed similar trends with the ISM Manufacturing Index slipping in September but a pickup in input costs.
Despite the sour mood among consumers and signs of moderation in services and manufacturing activity, trade and logistics indicators remain remarkably resilient. The Port of Los Angeles, the largest U.S. container port, handled a record number of units in September. That’s on top of strong rail traffic figures for the past three months. Strong cargo volumes suggest that demand for imported goods remains healthy and that supply chains continue to handle elevated levels of activity despite numerous economic uncertainties and higher shipping costs due to global fuel prices.
The labor market tells a story of moderation. U.S. payrolls added just 29,000 in September, far short of the 90,000 expected. Downward revisions to payroll gains in previous months dragged the six-month average to about 65,700. Unemployment ticked up—although it’s still historically low—while wage growth cooled slightly and the average workweek remained unchanged. It’s further evidence of the “one foot on the gas, one foot on the brake” dynamic we have highlighted throughout the year, with pockets of economic strength offset by areas of moderation. Uneven job growth will continue to frustrate markets but should ease the sense of urgency for the Federal Reserve (Fed) to hike interest rates again later this month, pushing it off until the December meeting.
Bottom line
The U.S. economy remains resilient as strong consumer spending, robust technology investment, and a healthy labor market support growth and keep recession fears at bay. However, elevated fuel costs, renewed price pressures within supply chains, and continued labor market normalization reinforce an uneven economic backdrop that should allow the Fed to wait until December to increase interest rates again.
