It’s getting harder to argue that the US economy is in good shape. At least, not without a ton of footnotes, caveats and fine print.
Concerns about the economy are validated most easily in the labor market, which, by practically all accounts, is looking bleaker and bleaker by the day. And inflation has started to creep up again. A key consumer inflation report due Thursday is expected to show the pace of price increases picked up in August.
This all comes as businesses remain in a state of paralysis over President Donald Trump’s tariff rollout. The hefty taxes have caused employers to veer away from taking on more workers, particularly in tariff-sensitive sectors like construction and manufacturing, where companies are cutting their workforces.
The economic reality has earned Trump negative marks with voters, according to recent polls.
But despite that, consumer spending — the backbone of the economy — has stayed strong. But credit card debt is at a record high, with the share of serious delinquencies — people carrying a balance for over 90 days — at the highest levels in over a decade, according to second-quarter data from the New York Federal Reserve.
The S&P 500 has also notched record highs this year. Much of the recent gains, though, are being fueled by investors’ growing belief that the Federal Reserve will cut interest rates at its meeting next week and at the remaining ones this year. That’s because dismal jobs data has created more of an urgency for the central bank to support the economy.
After an incredible post-pandemic run, the once seemingly unbreakable American economy is bending. But it’s certainly not broken.
Still good by historic standards
Data last week revealed that for the first time in four years, there are more people looking for work than there are jobs available for them. Then came Friday’s dismal jobs report, which showed employers hired just 22,000 new workers last month and the unemployment rate rose to the highest level since 2021. The labor force snapshot also revealed that the US economy lost 13,000 workers in June, marking the first month since 2020 when employers laid off more workers than they hired.
This week kicked off with new survey data released by the New York Federal Reserve indicating that job seekers believe there’s a 44.9% chance of finding a new job if they currently don’t have one. That’s the lowest reading on record since the survey began in 2013. It also represents a nearly 6% decline from July to August.
Over the next year, respondents also foresee a rising unemployment rate, lower earnings growth potential and a higher chance of losing their jobs.
For now though, the unemployment rate, which rose to 4.3% in August from 4.2% in July, is still below historic averages: Since the Bureau of Labor Statistics began reporting on the nation’s unemployment rate using current methodologies in 1948, it’s averaged 5.7%.
Inflation remains below historic levels, too. The nation’s annual inflation rate as measured by the Consumer Price Index is 2.7% as of July. That’s nearly a percentage point lower than the average rate dating back to 1948, according to BLS data. But consumers are bracing for annual inflation to climb to a 3.2% pace over the next 12 months, according to fresh New York Fed survey data released Monday. This comes as businesses have been shouldering hefty tariff bills since Trump ratcheted up his import taxes in the spring. Many retailers have started passing on costs to consumers by raising prices — and are warning of more to come.
Still, Alexander Field, an economics professor at Santa Clara University’s Leavey School of Business, said, “It is not hard to perceive ominous storm clouds on the horizon.”
“There is, of course, no guarantee that ominous clouds will deliver the future they seem to portend. But there is simply no plausible case today that the economy is doing really well now,” he said.
From ‘rolling recession’ to ‘rolling recovery’
Morgan Stanley’s equity team has a different view, instead predicting that what the US economy has experienced over the past few months is the worst it’s going to get for some time, barring substantially changing circumstances.
In a note published Monday, they wrote the latest jobs report supports their long-held belief that the US economy has been in a “rolling recession,” where certain sectors feel a marked slowdown while others continue humming along. That’s in contrast to a traditional recession when almost all parts of the economy get dragged down.
Now, the economy is shifting to a “rolling recovery,” they said.
“Central to our view is the notion that the economy has been much weaker for many companies and consumers over the past three years than what the headline economic statistics like nominal GDP or employment suggest,” they wrote. “We think a better way to measure the health of the economy is earnings growth (and breadth) as well as consumer and corporate confidence surveys.”
More companies are reporting higher future earnings growth potential compared to the past three years. “We think this supports the notion that the worst of the rolling recession is behind us,” they said.