Higher energy costs reemerge and cooling labor trends temper resilient economic outlook

Trend watch

Travel-related metrics, including air passenger traffic and hotel occupancy, continued their slide from peak summer levels. The weekly air passenger count fell for the sixth straight week, slipping to 16.0 million. Similarly, hotel occupancy is cooled for the past five weeks (it's on a one-week lag). 

Our take

Consumer sentiment – which is highly correlated with prices at the pump – is unlikely to get much relief from the energy front, as diesel prices have surged to a record high, while gasoline prices continue to climb. The national average is back above $4/gallon. West coast prices, which are higher due to refining capacity constraints, are roughly $1 above that, with California and Washington at $5.80 and $5.48, respectively. Of course, higher fuel costs squeeze household budgets and will keep inflation concerns at the forefront.

Meanwhile, the latest batch of economic data continue to paint a picture of an economy growing at a moderate pace, though with plenty of crosscurrents. Activity indicators tied to the movement of goods remain resilient, with U.S. rail freight volumes reaching a new all-time high, suggesting that demand throughout the supply chain remains healthy despite ongoing concerns about economic momentum.

The manufacturing sector continues to expand, but the pace of improvement cooled in August. The ISM manufacturing index remained in growth territory, extending the sector's gradual recovery, though several underlying measures pointed to a slower rate of acceleration compared to prior months. The manufacturing dashboard similarly showed broad-based gains, but the data suggest that activity is advancing at a more measured pace as firms navigate an environment of steady demand, elevated costs, and lingering uncertainty around the economic outlook.

By contrast, the service sector gained momentum in August. ISM services activity strengthened, and several key subcomponents improved, signaling continued expansion across much of the economy. However, the report also contained a noteworthy inflationary signal, as the prices-paid component jumped to its highest level in four years. The combination of firm activity and rising price pressures highlights the challenge facing policymakers, as economic growth remains intact even while certain pockets of inflation appear to be reaccelerating.

Labor market data continue to tell a mixed story. The main monthly jobs report – from the Bureau of Labor Statistics, which detail in a separate report – surprised to the upside in August after weaker prints for three straight months in May through July. However, the takeaway is that job growth remains uneven, with hiring trends oscillating from month to month rather than following a clear trajectory.

Adding to the softer tone, ADP reported that private-sector employment growth cooled in August, reinforcing the view that labor demand is moderating. While the labor market is no longer displaying the robust hiring conditions seen immediately after the pandemic, current readings remain more consistent with normalization than outright deterioration. Nonetheless, it cooled.

Yet, labor market turnover remains subdued. Job openings increased in July, suggesting employers continue to seek workers, but both hiring and quits rates moved lower. These trends reinforce the increasingly familiar "low hire, low fire" dynamic, where businesses are reluctant to aggressively add workers but are equally hesitant to reduce headcount. The gradual normalization in job openings, alongside relatively stable layoffs, hiring, and quits, suggests a labor market that is cooling slowly rather than cracking, supporting the broader narrative of an economy that remains resilient but is steadily losing momentum.

Bottom line

The U.S. economy continues to trudge through despite challenges and unevenness. The manufacturing sector continues to expand, albeit modestly, while the services side appears to be gaining momentum. But housing continues to struggle with higher-for-longer interest rates, while inflation remains a persistent issue. That’s why we continue to say that it feels like “one foot on the gas, and one foot on the brake.”