Labor Market Holds Firm as Inflation Runs Below Forecasts and Factories Keep Expanding

Matthew Rubin Chief Investment Officer

 

1. Initial and continuing jobless claims both fell last week, with continuing claims reaching their lowest level in three years.
2. August inflation came in cooler than expected, while consumer spending and revised growth figures pointed to sustained underlying demand.
3. Manufacturing surveys stayed in expansion territory in September, though input costs continued to rise.

 

1. Jobless Claims Edge Lower as Labor Market Remains Healthy

Initial jobless claims fell to 197,000 last week, below expectations of 200,000.^1,2 Continuing claims, which track the total number of people receiving unemployment benefits, fell to 1.70 million.¹ That reading came in under the 1.72 million forecast and was the lowest level in three years.^1,2 The four-week average, which smooths out weekly swings, held near 200,000.¹

Together, the figures suggest layoffs remain limited and labor market conditions are healthy. Claims have stayed in a narrow range for much of the year, and few employers appear ready to cut staff, even as hiring has slowed.

Steady employment should support household income and consumer spending, which helps sustain economic growth. In our view, a solid labor market also gives the Federal Reserve (Fed) more room to concentrate on inflation, particularly as higher energy prices and manufacturing input costs suggest that price pressures will persist in the months ahead.

2. Inflation Comes in Below Forecasts Amid Positive Spending and Growth Trends

Personal consumption expenditures (PCE) inflation for August rose 0.3% for the month.³ Core PCE, which excludes more volatile food and energy prices, rose 0.2%, below forecasts for a 0.3% increase.^3,2 On an annual basis, headline inflation ran at 3.4% and core inflation at 3.0%.³ Annual revisions, which included methodology changes, suggest that inflation has been running at a somewhat cooler pace than earlier estimates showed.³

Spending data were firm as well. Real consumer spending grew 0.6% in August, the strongest monthly gain since March of last year. Revised income figures showed a higher household saving rate than first reported, though it fell to 4.1% in August, its lowest level since late 2022.³ Households may have more of a cushion than earlier data suggested, though August spending outpaced income.

The final estimate for second quarter real gross domestic product showed the economy expanded at a 2.2% annual rate, up from the prior estimate of 1.5%.⁴ Real final sales to private domestic purchasers, a measure that strips out government spending, inventories, and trade, grew at a 4.6% annualized pace.⁴ We view this data point as a clean read on private demand, underscoring the strength of the U.S. consumer.

3. Manufacturing Surveys Point to Continued Expansion

The final S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) for September was revised down to 55.9, below forecasts of 57.0.^5,2 Even after the revision, the reading was the highest in more than four years and marked the 14th consecutive month above the 50.0 level that separates expansion from contraction.⁵

All five major components contributed positively to the index, led by output and new orders.⁵ Employment rose as firms added capacity to meet demand.⁵ Input prices climbed at a faster pace, reflecting tariffs, energy costs, and material shortages, so some cost pressure remains in place.⁵

The Institute for Supply Management (ISM) Manufacturing PMI edged lower to 54.5, modestly below expectations of 55.0.^6,2 Declines in production, inventories, and supplier deliveries weighed on the headline figure, but were partly offset by gains in new orders and employment.⁶ Together, the two PMI reports point to continued expansion and healthy demand, which should support the broader economy and labor market.

Looking Ahead

1. ISM Services PMI – Monday, October 5^th
2. Federal Open Market Committee (FOMC) Minutes – Wednesday, October 7^th
3. Michigan Consumer Sentiment, Preliminary – Friday, October 9^th

Why It Matters

Services account for most of U.S. economic activity, so today’s reading will show whether the strength seen in manufacturing extends to the rest of the economy. The employment component is worth watching after it held below the expansion line in August.⁷ Wednesday’s release of the FOMC meeting minutes will offer more detail about how officials weighed inflation against labor market conditions at the September meeting, which may help clarify the policy path into year-end. Friday’s sentiment survey rounds out the week; its inflation expectation measures matter because the Fed tracks them for signs that households expect price pressure to persist.

For the period ending 10/2/26.
*Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Department of Labor, Employment and Training Administration, Unemployment Insurance Weekly Claims News Release, October 1, 2026
² Bloomberg L.P., Economic Calendar (ECO), Median Economist Survey Estimates, accessed October 2, 2026
³ U.S. Bureau of Economic Analysis, Personal Income and Outlays, August 2026
⁴ U.S. Bureau of Economic Analysis, Gross Domestic Product, Second Quarter 2026 (Third Estimate), September 2026
⁵ S&P Global, S&P Global US Manufacturing PMI, September 2026
⁶ Institute for Supply Management, Manufacturing ISM Report On Business, September 2026
⁷ Institute for Supply Management, Services ISM Report On Business, August 2026

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