U.S. economy continues to plod through at a moderate pace 

Note: As always, there was a separate Economic Commentary discussing the monthly jobs report published on August 7^th. 

Trend watch

Air passenger traffic has slowed of late. At 18.7 million, it’s not weak by any means, but it’s now even year-to-date compared to last year after having been up more than 1% as recently as mid-May. 

Our take

The latest batch of data suggest the economy continues to expand at a moderate pace. Growth remains resilient across most sectors, although consumer spending and labor market conditions continue to normalize.

Consumer activity showed some moderation in July, as new auto sales cooled after reaching a 14-month high in June. The pullback suggests demand remains healthy but is no longer benefiting from the same degree of pent-up strength seen earlier in the summer. Even so, vehicle sales remain at levels consistent with a consumer that is still willing and able to spend despite lingering economic uncertainty.

The manufacturing sector provided a more encouraging signal. ISM manufacturing activity climbed to its highest level in four years, supported by broad improvement across the survey's underlying components.

Just as important, price pressures eased during the month, offering evidence that stronger factory activity is not necessarily translating into renewed inflation concerns. That improvement points to a manufacturing sector which may finally be gaining momentum after an extended period of weakness, stretching back to roughly three years.

Productivity data also contributed to the constructive backdrop. Output per worker increased modestly during the second quarter, while labor costs remained steady. This combination suggests businesses are continuing to find efficiencies that help support profitability without generating significant wage-driven inflation pressures. The productivity gains, while not dramatic, provide another indication that the economy's supply side remains healthy.

Meanwhile, the labor market continues to evolve in an orderly fashion. Job openings declined further as the normalization process continued, but hiring picked up and the quits rate remained steady. Combined with stable layoff activity, the data reinforce the "low hire, low fire" dynamic that has characterized the labor market in recent quarters. That was quite evident in the weak July jobs report, which showed U.S. payrolls lost 23,000.

The services sector echoed this broader theme. While overall ISM services activity remained subdued and largely treading water, 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.

From an inflation standpoint, this moderating data should allow the Federal Reserve (Fed) to maintain a patient approach. 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 16^th, including the three key inflation metrics along with the August jobs report and other supplementary employment data.

Alas, the Iran situation remains a huge wildcard and status of the Strait of Hormuz will deeply influence the price of U.S. crude oil, which is ticking upward once again. In turn, a meaningful resurgence of inflation could box in the Fed, forcing a response that they appear loath to take.

Ultimately, this sluggishness reflects the ‘one foot on the gas, one foot on the brake’ dynamics within the U.S. economy we’ve been chirping about for the past few months. It also reinforces our view that the Fed will stay on hold in the near term. That said, there’s a lot more data – including the key inflation metrics and another jobs report – ahead of the next rate-decision meeting in mid-September. 

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 pose an upside risk. Still, our view stands that the bar remains high for a Fed rate hike this year.