US Economic Performance Gauge

Inflation Outlook

Underlying inflation remains relatively contained, although the latest trend shows some renewed upward pressure. The data therefore support continued disinflation, but suggest the process may not proceed in a straight line. Consumer spending growth is outpacing the rise in core prices by a meaningful margin, suggesting nominal consumption is being supported by underlying demand rather than inflation alone.

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. Consumer spending remains particularly strong, providing a significant source of near-term economic momentum and helping offset weakness in other areas of the economy.

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 has fallen to historically depressed levels (48.1), highlighting a significant disconnect between current household activity and confidence in the forward economic outlook. 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, the economy continues to expand but momentum is clearly moderating. Positive real growth and continued consumer spending provide a degree of resilience, while subdued household confidence suggests the expansion is becoming less comfortable. The current configuration is therefore better characterized as normalization than contraction, although further deterioration in demand or labor-market conditions would increase downside risk.

Employment Outlook

Both headline and broader measures of unemployment remain near historically low levels, indicating that the labor market continues to operate under exceptionally tight conditions with little evidence of broad-based labor slack. Payroll growth has weakened substantially, suggesting that hiring demand continues to cool as businesses become more cautious in expanding payrolls. Hiring fell approximately 60k jobs short of consensus expectations. In addition, the previous month’s payroll estimate was revised lower by 29k jobs, indicating labor demand was weaker than initially reported.

The labor force expanded by approximately 485 thousand workers during the month. The increase in available workers suggests labor supply continued to improve, helping alleviate labor market tightness while making any rise in the unemployment rate more reflective of improving participation than weakening labor demand.

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 is consistent with continued moderation in labor demand. Softer hiring activity together with slowing wage growth suggest labor market tightness continues to ease, reducing the risk of persistent wage-driven inflation.