The latest batch of economic data continues to paint a picture of an economy growing at a moderate pace, though with plenty of crosscurrents. Mixed data from labor markets supports the broader narrative of a resilient but cooling economy.
Higher prices at the pump—averaging about $4 a gallon nationally and above $5.50 on the refinery capacity-constrained West Coast—have dampened consumer sentiment. This squeezes household budgets and will keep inflation concerns at the forefront.
The manufacturing sector continued its expansion and gradual recovery, but the pace of improvement cooled in August. The ISM manufacturing index remained in growth territory, though several underlying measures pointed to a slower rate of acceleration compared to prior months. The manufacturing dashboard showed broad-based gains, but activity is advancing at a more measured pace as firms navigate an environment of steady demand, elevated costs, and lingering uncertainty around the economic outlook.
The service sector gained momentum in August. ISM services activity strengthened, and several key subcomponents improved, signaling continued expansion across much of the economy. However, the report also contained an inflationary signal as the prices-paid component jumped to its highest level in four years. The combination of strong activity and rising price pressures highlights the challenge facing policymakers, as economic growth continues while pockets of inflation appear to be reaccelerating.
Labor market data remains mixed. The main monthly jobs report from the Bureau of Labor Statistics surprised to the upside, adding 162,000 jobs in August, well above the consensus expectation of 55,000. The July tally was revised upward, flipping to a gain of 21,000 from -23,000 and helping to push the six-month average up to 106,500. Job growth remains uneven, with hiring trends oscillating from month to month rather than following a clear trajectory.
At the same time, ADP reported that private-sector employment growth cooled in August. Similarly, labor market turnover has stayed low. Job openings increased in July, suggesting employers continue to seek workers, but both hiring and quits rates moved lower. These trends reinforce the "low hire, low fire" dynamic, where businesses are reluctant to aggressively add workers but are equally hesitant to reduce headcount. Moreover, there’s also another rhyme to add the tepid job growth dynamic – “retire” – as some older workers choose to retire thanks to wealth effects such as strong stock market returns in the past decade and higher home values.
Turning to interest rates, the yield on the 10-year U.S. Treasury is hovering near 4.8%, which is near the highest level in roughly 20 years. Higher-for-longer restricts growth especially for interest sensitive parts of the economy such as housing and auto sales. Accordingly, with higher prevailing rates and mixed economic data, Federal Reserve (Fed) policymakers will likely remain on hold for now, though it’ll likely be a close call. However, additional economic releases, including another round of key inflation data, will be closely watched ahead of the Fed's September 16 policy decision.
Bottom line
The U.S. economy is trudging on despite challenges and unevenness. The manufacturing sector continues to expand, albeit modestly, while the services side appears to be gaining momentum. But housing and other interest sensitive parts of the economy continue to struggle with higher-for-longer interest rates, while inflation remains a persistent issue. We continue to say that it feels like “one foot on the gas, and one foot on the brake.”
