Economic Outlook

Inflation: Improving but Still Above Target

Inflation has continued to cool, but the improvement is uneven. Core CPI eased to 2.4% year-over-year in August, while headline CPI remained at 3.4%. Energy prices increased 16.3% over the year and continued to hold headline inflation above the core rate. Energy therefore remains a key risk that could stall or reverse the recent progress.

Nevertheless, inflation remains above the Federal Reserve's long-run target, and persistent cost pressures continue to affect households and businesses. While inflation remains an important concern, labor market conditions will be watched closely by policymakers as they evaluate future monetary policy decisions.

Consumer Outlook: Spending Resilient, Confidence Weak

Consumers continue to support economic activity through resilient spending, although confidence remains weak and expectations have deteriorated. Ongoing concerns regarding affordability, financial security, and economic uncertainty continue to weigh on sentiment even as consumption remains relatively resilient.

Looking ahead, slower job growth and moderating wage gains could place additional pressure on household finances and consumer spending. The growing divergence between resilient economic activity and depressed consumer confidence raises questions about the durability of current growth trends.

Business Activity: Resilient but Cautious

Business activity continues to outperform expectations. Manufacturing has now expanded for eight consecutive months; the ISM Manufacturing PMI reached a four-year high of 55.6 in July before easing to 54.6 in August as new orders and order backlogs slowed. The services sector has remained in expansion. These indicators suggest that businesses are continuing to navigate a challenging environment with greater resilience than many anticipated.

Even so, companies remain cautious. Elevated operating costs and policy uncertainty are contributing to restrained hiring plans and more selective capital investment decisions. Organizations remain focused on maintaining flexibility and preserving liquidity while navigating an increasingly uncertain environment.

Supply Chains: Improved but Not Risk Free

Global supply-chain pressures eased over the past year, reducing pressure on freight costs and goods inflation, and improved logistics and inventory management contributed to greater stability across many industries. That improvement, however, is now at risk of reversing rather than continuing to build.  Geopolitical tensions, trade disruptions, and energy-market volatility continue to represent significant threats that could quickly reverse recent improvements and create renewed inflationary pressure.

Interest Rates: Fed Resumes Tightening

The Federal Reserve raised the federal funds target range by 25 basis points to 3.75% — 4.00% at its September 16 meeting. The decision was unanimous and followed the July meeting, when the Fed held rates unchanged and three members favored an immediate quarter-point increase. The Committee stated that inflation remains elevated and that the policy action would support a timelier return to its 2% goal.

The rate increase reflects the tension between persistent inflation and a labor market that stabilized following July's weakness. August payrolls increased by 162,000, the unemployment rate remained at 4.1%, and August CPI rose 3.4% from a year earlier, with core CPI increasing 2.4%. These conditions reduced the near-term constraint on tighter policy, although future decisions will continue to depend on inflation, employment, and broader economic developments.

Downside Risks: Increasingly Important

Several risks could materially weaken the economic outlook, including:

• A deeper-than-expected labor market slowdown
• Persistent inflationary pressures
• Higher-for-longer interest rates and tighter financial conditions
• Geopolitical escalation and energy-market disruptions
• Financial market volatility
• Renewed supply-chain disruptions

While a soft landing remains achievable, the outlook is less secure than earlier in the year. Economic growth continues, but an uncertain labor market, cautious consumers, and heightened geopolitical risks have shifted the balance of risks more clearly toward the downside. Businesses should remain focused on liquidity, operational flexibility, and disciplined capital allocation as the economic environment becomes increasingly challenging.

Concluding Perspective

The U.S. economy remains on a path of expansion, but the balance of evidence suggests that growth is becoming increasingly dependent on a few areas of resilience, particularly consumer spending and ongoing business activity. At the same time, a more moderate pace of hiring, slowing employment growth, subdued consumer confidence, and continued policy uncertainty indicate that economic momentum is becoming less durable. The September rate increase adds further pressure for rate-sensitive households and businesses and reinforces the risk that restrictive financial conditions could weigh on future growth. The cooling in core inflation and earlier supply-chain improvement are constructive, but these gains are uneven and fragile: energy prices remain elevated on the Iran conflict, headline inflation is still above target, and fresh geopolitical risks around the Strait of Hormuz could reverse recent supply-chain progress. Combined with a labor market that is cooling rather than collapsing, these crosscurrents leave the outlook less reassuring than the improvement in a few indicators might suggest. A soft landing remains achievable, but the path forward has narrowed. Businesses should maintain a disciplined focus on liquidity, workforce planning, and capital allocation while preserving the flexibility needed to respond to changing economic conditions. In an environment where uncertainty remains high and risks are increasingly asymmetric, organizations that prioritize resilience and adaptability will be best positioned to navigate the next phase of the business cycle.