The economy continues to expand at a moderate pace supported by resilient consumer spending, an uptick in the manufacturing sector, normalizing labor conditions, and moderating inflation.
Consumer activity eased in July, as new auto sales cooled after reaching a 14-month high in June. Demand remains healthy but is no longer benefiting from the pent-up strength seen earlier in the summer. Vehicle sales levels point to a consumer that is still willing and able to spend despite lingering economic uncertainty. With consumers accounting for more than two-thirds of economic activity, their resilience remains a critical pillar of the expansion.
The manufacturing sector has offered encouraging signals. Institute for Supply Management (ISM) manufacturing activity climbed to its highest level in four years, supported by broad improvement across the survey's underlying components. Price pressures eased during the month, suggesting that factory activity isn’t necessarily translating into renewed inflation concerns. The manufacturing sector may finally be gaining momentum after an extended period of weakness, stretching back over three years.
Output per worker increased modestly during the second quarter, while labor costs remained steady. These productivity gains suggest that businesses are finding efficiencies that support profitability without generating wage-driven inflation—another indication that the economy's supply side remains healthy.
On the services side, ISM services activity remained subdued with most underlying components improved in July. The notable exception was employment, which weakened, while prices moved higher, highlighting a service sector that remains stable but is still navigating a mixed and uneven growth environment.
Meanwhile, the labor market continues to normalize. Job openings declined further, but hiring picked up, and the quits rate remained steady. Combined with stable layoff activity, the data reinforces the "low hire, low fire" mode that has characterized the labor market in recent quarters. Case in point was the weak July jobs report, which showed U.S. payrolls lost 23,000. While the private sector gained 30,000, governments lost 53,000 positions, with the losses concentrated in local level education jobs.
The moderating inflation data should allow the Federal Reserve (Fed) to be patient. Despite markets pricing in a more hawkish policy path recently, we remain solidly in the camp that the Fed will stay on hold over the near term. However, there’s a lot more data before the Fed meeting on September 16th, including the key inflation metrics for both July and August along with the August jobs report and other supplementary employment data. The Iran situation remains a huge wildcard and the status of the Strait of Hormuz will deeply influence the price of U.S. crude oil, which is ticking upward once again. A meaningful resurgence of inflation could box in the Fed, forcing a response that they seem reluctant to take.
Bottom line
Despite crosscurrents, the U.S. economy remains on solid footing, supported by resilient consumer spending and strong technology investment. Meanwhile, business investment remains healthy, while manufacturing appears to be gathering some momentum signaling continued economic expansion. Moderating data and cooler inflation should let the Fed stay on hold, though the recent resurgence in gasoline prices poses an upside risk. Still, our view stands that the bar remains high for a Fed rate hike this year.
