Just one month ago, the big story about the U.S. economy was its surprising strength. The August jobs report showed that payrolls increased by 162,000, while the Atlanta Federal Reserve’s GDPNow model at one point was estimating that real GDP could grow at more than a 5% annual rate in the third quarter.
That picture changed quickly when the September jobs report showed payroll growth of just 29,000, along with downward revisions to employment gains in previous months.
The sharp change is a good reminder that investors should be careful about drawing broad conclusions from any single economic report—or even a few months of data. Economic statistics are estimates and can be surprisingly volatile from month to month. The economy itself typically changes much more gradually.
Rather than reacting to every data point, investors may be better served by focusing on the underlying fundamentals that influence the economy over time. These include monetary policy, taxes, trade, regulation, consumerspending, business investment, productivity and technological innovation.
There were also some encouraging details within the September employment report. An alternative measure of employment that includes small-business activity showed a gain of approximately 406,000 jobs. The unemployment rate increased modestly, from 4.1% to 4.2%. More importantly, part of that increase reflected more people entering the labor force, either by working or actively looking for work. A growing labor force can be viewed as a positive sign because it indicates that more people are participating in the economy.
So, where does this leave the overall economic picture?
Based on the latest information, economic growth in the third quarter still appears reasonably solid. Current estimates suggest real GDP could have grown somewhere in the 3% to 3.5% range at an annual rate. The Atlanta Fed's GDPNow estimate has also moved closer to that range, recently pointing to growth of approximately 3.7%.
This illustrates just how quickly economic forecasts can change as new information becomes available.
The employment and inflation data also give the Federal Reserve some flexibility when considering its next policy move. Wage growth has remained relatively moderate, with average hourly earnings increasing just 0.1% in September and about 3% over the past year. That pace is broadly consistent with an economy where inflation pressures are becoming more contained.
Inflation data provides another reason for the Fed to proceed carefully. Consumer price inflation excluding energy has moderated to around 2.5%, while other measures of underlying inflation have also shown signs of improvement. If those trends continue, overall inflation could gradually move closer to the Federal Reserve's 2% objective.
That does not mean inflation risks have disappeared. They have not. The economy continues to grow, and nominal GDP, which combines real economic growth with inflation, has been increasing at a relatively strong pace. That suggests monetary policy still needs to balance two competing risks: keeping inflation under control while avoiding unnecessary pressure on areas of the economy that are already showing signs of weakness.
One challenge for policymakers is that higher interest rates do not affect every part of the economy equally. Rate-sensitive areas such as housing and automobile purchases can slow significantly when borrowing costs rise. At the same time, some of the economy's strongest areas, includinginvestment in artificial intelligence, data centers and other technology infrastructure, may be less sensitive to changes in short-term interest rates.
For investors, the larger lesson is that economic data should be viewed as pieces of a much bigger picture. A weak jobs report does not necessarily mean the economy is headed for recession, just as a strong jobs report does not guarantee continued rapid growth.
Economic conditions can change, forecasts can change and individual reports can be revised. Maintaining a long-term perspective can help investors avoid making major portfolio decisions based on short-term economic headlines.
At this point, the U.S. economy continues to show both strengths and areas of concern. Growth remains positive, inflation is moving in a more favorable direction, and the labor market is showing some signs of cooling. That combination gives policymakers room to remain patient while they assess how the economy evolves in the months ahead.