US Economic Performance Gauge

Inflation Outlook

Recent inflation data suggest that underlying price pressures continue to moderate toward more sustainable levels. The combination of a relatively low monthly Core PCE reading and continued improvement in the trend is consistent with a broader disinflation process. Consumer spending growth continues to lag core inflation, suggesting higher prices are absorbing a meaningful portion of nominal consumption growth and placing some pressure on real purchasing power.

Beyond consumer inflation, economy-wide pricing pressures accelerated sharply during the quarter. The GDP price deflator points to broad and increasingly persistent cost pressures extending well beyond household consumption into business investment, government expenditures, and the wider production chain. Such readings indicate that elevated pricing pressures remain broadly distributed across the economy and are generally inconsistent with a durable return to price stability, reinforcing the case for maintaining a restrictive monetary policy stance

The moderation in wage growth provides further evidence of easing labor market pressure. Slower earnings growth reduces the risk that labor costs become a persistent source of inflation in core services, providing additional support for the broader disinflation process.

Overall, the inflation picture remains mixed. Consumer inflation is moving in the right direction, but elevated economy-wide price pressures indicate that the disinflation process has not yet become sufficiently broad-based to establish durable price stability.

Growth Outlook

Economic growth remains positive but has transitioned toward a below-trend pace. This deceleration suggests that the cumulative effects of restrictive policy are increasingly weighing on broader output. Recent retail sales data point to a contraction in consumer demand, suggesting that household spending is no longer providing its customary buffer to broader economic weakness.

The large gap between nominal and real GDP growth indicates that price effects are accounting for a substantial portion of headline economic expansion. With nominal GDP growing substantially faster than real output, the headline pace of economic expansion materially overstates the underlying volume of activity.

Consumer sentiment remains subdued at 51.0, indicating that household confidence is weaker than current spending patterns alone would suggest. The Sahm Rule remains comfortably below recessionary levels, providing evidence that the current moderation in growth has not yet developed into a broad labor-market downturn.

Overall, growth is losing momentum, with below-trend real activity increasingly accompanied by weaker consumer demand. The economy has not yet entered a recessionary phase, but the loss of household spending support increases the risk that the slowdown becomes more pronounced.

Employment Outlook

Headline unemployment rate remains historically low, while broader measures of labor utilization suggest conditions are gradually normalizing from exceptionally tight levels rather than signaling a meaningful deterioration in labor demand. Nonfarm payroll employment contracted during the month, indicating hiring activity weakened outright rather than merely moderating. The decline suggests employers have become increasingly cautious amid softer labor demand and a less supportive economic backdrop. Hiring fell approximately 108k jobs short of consensus expectations. In addition, the previous month’s payroll estimate was revised lower by 37k jobs, indicating labor demand was weaker than initially reported.

The labor force contracted by approximately 264 thousand workers during the month, indicating a moderate decline in workforce participation.

Slowing earnings growth reinforces the broader moderation evident across payroll growth and labor utilization measures, suggesting labor demand is cooling across a wider range of industries while reducing the risk of persistent wage-driven inflation.

Tighter financial conditions are likely reinforcing the broader cooling evident across hiring, wage growth and labor force dynamics. Higher borrowing costs continue to weigh most heavily on interest-sensitive sectors, contributing to slower hiring momentum without yet producing evidence of widespread layoffs.

Overall, the employment report points to a weaker underlying labor market than the headline unemployment rate alone would imply. Although the unemployment rate declined during the month, the improvement appears largely attributable to a contraction in labor force participation rather than stronger hiring. Combined with outright payroll contraction and slowing wage growth, the report suggests labor demand continued to cool while inflationary labor pressures eased further.