The Menger Economic Outlook

Sep 11

12 min read

Resilient Growth, Persistent Inflation, and the Emergence of a Higher-Cost-of-Capital Economy

Menger Business Review September 11th 2026

Executive Thesis

The United States economy is entering a consequential phase of the current economic cycle. The evidence does not presently describe an economy in broad contraction. Employment expanded materially in August. Manufacturing remains in expansion. Services activity has accelerated. New orders across significant portions of the economy remain positive, and private-sector activity continues to demonstrate considerable resilience.

Yet the same evidence does not describe a return to the benign economic environment that characterized much of the decade following the Global Financial Crisis.

Inflation remains persistent. Business surveys indicate substantial price pressure. Long-term interest rates remain economically consequential. Federal borrowing requirements are large. Geopolitical and energy risks have increased. The labor market, while stronger than feared earlier in the summer, remains uneven. And the price of capital continues to exert discipline across households, businesses, governments, and financial markets.

The central thesis of the September Menger Economic Outlook is therefore:

The United States is not presently entering a conventional recession. It is transitioning into a more capital-constrained economic regime in which growth can persist, but inflation and the cost of capital will increasingly determine the quality and durability of that growth.

The central economic contest is consequently shifting.

It is no longer simply:

Growth vs. Recession.

It is increasingly:

Growth vs. Inflation vs. Cost of Capital.

That distinction defines the Menger outlook.

I. The Menger Economic Framework

Economic forecasting becomes unreliable when it begins with financial markets.

Markets represent the downstream pricing of expectations concerning the economy.

The analysis should therefore begin further upstream.

The Menger framework evaluates the economy through the following sequence:

Economic Activity → Employment → Income → Consumption → Production → Inflation → Monetary Policy → Treasury Curve → Credit → Cost of Capital → Corporate Behavior → Asset Prices

These relationships are not perfectly linear.

Feedback loops exist throughout the system.

Higher interest rates can weaken investment.

Lower investment can eventually reduce employment.

Lower employment can weaken consumption.

Weaker consumption can reduce inflation.

Lower inflation can alter monetary policy.

Monetary policy can change financial conditions.

Financial conditions can then affect investment again.

The purpose of the framework is therefore not to create a mechanical forecasting equation. It is to identify the transmission mechanisms through which economic change occurs. From this perspective, the September data reveal something important.

Economic activity remains resilient. But the economic price of that resilience is becoming increasingly important.

II. Growth: The Expansion Remains Intact

The first conclusion of the Menger outlook is straightforward:

The U.S. economic expansion remains intact.

The most recent estimate placed second-quarter real GDP growth at an annualized 1.5 percent.

That headline figure alone understates some of the underlying strength because measures of private domestic demand have been considerably stronger. More recent business surveys reinforce the expansionary interpretation. The August ISM Manufacturing PMI registered 54.6. A reading above 50 indicates expansion in manufacturing.

The August report therefore marked the eighth consecutive month of manufacturing expansion.

Production registered 58.3.

New orders registered 53.7.

Employment registered 51.2.

Manufacturing is consequently not merely avoiding contraction. Important components of industrial activity remain expansionary.

Services provide an even stronger signal.

The August Services PMI registered 55.4, rising from 54.1 in July.

Business Activity reached 61.7.

New Orders reached 60.9.

These readings indicate substantial momentum across the service economy.

The current evidence therefore makes an immediate broad-based recession difficult to establish as the central case. The American economy is still growing. The more important question is what kind of growth is emerging.

III. The Labor Market: Better, but Not Unambiguously Strong

August employment materially changed the near-term economic picture.

Nonfarm payroll employment increased by 162,000, while unemployment remained at 4.1 percent.

Moreover, previous estimates for June and July were revised upward by a combined 55,000 positions.

The July employment estimate, initially reported as a 23,000 decline, was revised to a gain of 21,000.

These revisions reduce the severity of the labor-market deterioration that appeared evident only several weeks earlier.

Manufacturing employment increased by approximately 16,000 during August and has risen by 58,000 since its recent December 2025 low. Average hourly earnings increased 0.3 percent during August and 3.1 percent over the preceding twelve months. These are constructive developments. Nevertheless, a closer examination reveals important divergence. The ISM Manufacturing Employment Index remained expansionary at 51.2 The Services Employment Index, however, registered only 47.8, its second consecutive month below 50.

Thus:

Services Activity: 61.7

Services New Orders: 60.9

Services Employment: 47.8

That divergence is economically significant.

Demand is expanding considerably faster than employment diffusion.

Several interpretations are possible.

Businesses may remain cautious about permanent hiring.

Labor costs may discourage expansion.

Productivity improvements may allow firms to increase output without proportionate employment increases.

Automation and artificial intelligence may be beginning to alter labor requirements in particular industries.

Or companies may simply be waiting for greater visibility before increasing payrolls.

The Menger interpretation is therefore:

The labor market has stabilized relative to the July scare, but it has not returned to broad-based strength. This remains one of the most important variables to monitor.

IV. Inflation: The Constraint Has Returned to Center Stage

The economic discussion has spent considerable time asking when the Federal Reserve will ease. The more important question may be whether inflation will permit it.

July CPI inflation stood at 3.4 percent year over year.

That rate remains materially above the Federal Reserve's 2 percent longer-run objective.

More importantly, current business surveys indicate continuing upstream price pressure.

The ISM Manufacturing Prices Index registered 71.1 in August.

The ISM Services Prices Index registered 72.6.

The services reading was the highest since August 2022.

This creates one of the most important relationships in the current outlook:

Economic Resilience + Elevated Input Prices = Persistent Inflation Risk

The problem is not necessarily that inflation must accelerate dramatically.

The problem is persistence. An economy capable of maintaining strong demand while businesses continue reporting substantial cost increases may have difficulty achieving the final stage of disinflation. This is particularly important because the August CPI report has not yet been released as of this publication date. The next consumer inflation report is therefore an important test of the Menger thesis.

V. Why Inflation May Be Structurally More Persistent

Inflation should not be understood solely through the monthly CPI report.

The structural environment itself has changed. The United States and other advanced economies are simultaneously confronting:

large fiscal financing requirements,

industrial reshoring,

supply-chain restructuring,

higher defense expenditures,

energy infrastructure requirements,

artificial-intelligence investment,

data-center construction,

electricity demand,

housing constraints,

geopolitical fragmentation,

and changing trade relationships.

All of these developments compete for real economic resources.

Labor.

Capital.

Energy.

Copper.

Steel.

Semiconductors.

Construction capacity.

Land.

Electricity generation.

Transportation.

Engineering.

The relationship becomes:

Investment Demand + Fiscal Demand + Consumer Demand → Competition for Finite Productive Resources → Price Pressure

This does not imply permanently high does suggest that the structural disinflationary environment of the 2010s should not automatically be assumed to return.

The economic regime may have changed.

VI. Monetary Policy: The Fed Is Not the Entire Interest-Rate Story

Financial markets frequently reduce monetary analysis to a single question:

When will the Federal Reserve cut rates?

That question is incomplete.

The federal funds rate represents the short end of the interest-rate structure.

Businesses, homeowners, governments, investors, and financial institutions operate across an entire yield curve.

Therefore:

Federal Funds Rate ≠ Economy-Wide Cost of Capital

A Federal Reserve rate reduction can lower short-term financing costs.

But if investors remain concerned about inflation, fiscal borrowing, Treasury supply, or long-run monetary uncertainty, longer-duration yields may remain elevated.

This is why the Menger outlook places substantial emphasis on the long end of the Treasury curve.

The 10-year Treasury affects mortgage rates, corporate borrowing, valuation models, commercial real estate, and numerous other financial conditions. The 30-year Treasury extends the signal further into long-duration inflation, fiscal, and term-premium expectations.

The Federal Reserve controls the overnight policy rate.

The bond market prices decades.

That difference matters.

VII. The Treasury Market May Become the Principal Economic Disciplinarian

The Treasury market increasingly sits at the center of the economic outlook.

Consider the transmission mechanism:

Fiscal Deficit → Treasury Issuance → Demand for Capital → Treasury Yields → Corporate Yields → Mortgage Rates → Investment Hurdle Rates → Capital Allocation

If government borrowing remains structurally high, investors must absorb significant quantities of Treasury securities. The question is not whether the United States can issue debt. The economically interesting question is:

At what yield will investors willingly absorb it?

That yield becomes a benchmark for much of the global financial system.

This introduces the possibility of an important new regime.

The Federal Reserve may eventually become more accommodative while the bond market remains restrictive. If that occurs, businesses expecting a return to the extremely inexpensive financing environment of the 2010s could be disappointed.

VIII. Credit: The Transmission Mechanism to Watch

Treasury yields become economically consequential when they move through credit markets.

The relevant sequence is:

Treasury Yield → Credit Spread → Corporate Yield → Borrowing Decision → Investment → Employment → Production

This is where monetary and fiscal conditions reach the real economy.

Companies refinancing debt at higher yields may reduce capital expenditures.

Highly leveraged businesses may prioritize debt reduction. Private-equity transactions may require larger equity contributions. Commercial-property projects may no longer meet required returns. Smaller companies may encounter tighter bank lending standards. Households may delay housing purchases because mortgage payments remain high.

The economy can therefore continue growing while simultaneously accumulating financing pressure. This is why credit should be treated as a leading transmission mechanism rather than a secondary market indicator.

The Menger outlook will consequently place increasing emphasis on:

investment-grade spreads,

high-yield spreads,

bank lending standards,

commercial and industrial lending,

private-credit conditions,

default rates,

and corporate refinancing requirements.

A significant deterioration across these indicators would materially change the outlook.

IX. The Consumer: Resilient, but Not Invulnerable

The American consumer remains one of the principal supports of the economy.

Employment continues to generate household income.

Nominal wages continue to rise.

Asset ownership supports portions of household wealth.

Credit remains available.

But household resilience should not be confused with unlimited capacity.

Consumers continue to face a substantially higher cumulative price level than several years ago.

Housing remains expensive.

Insurance costs have increased.

Financing costs remain high.

Credit-card borrowing is expensive.

Energy prices remain vulnerable to geopolitical developments.

And household saving provides less protection for some consumers than it did earlier in the cycle.The consumer outlook therefore depends heavily upon employment.

The sequence is:

Employment → Income → Consumption → Corporate Revenue → Employment

This is one of the economy's most important feedback loops.

As long as employment remains sufficiently strong, consumption can continue supporting the expansion. If labor demand deteriorates materially, the consumer becomes considerably more vulnerable. For this reason, the labor market remains the principal downside trigger in the Menger outlook.

X. Corporate America Enters the Capital-Discipline Era

The economic environment facing corporate executives has changed.

For years, cheap capital allowed companies to finance growth, acquisitions, inventories, real estate, share repurchases, and speculative investments at comparatively low hurdle rates.

Higher capital costs change the mathematics.

Consider a simplified corporate decision:

Expected Project Return > Cost of Capital → Invest

Expected Project Return < Cost of Capital → Reject

As the cost of capital increases, fewer projects satisfy the required return.

This creates greater pressure on management to distinguish between:

revenue growth and profitable growth,

accounting earnings and cash flow,

expansion and value creation,

leverage and productive capital,

nominal returns and real returns.

The next economic regime may therefore reward financial discipline more heavily than the previous one. Companies possessing strong balance sheets, high returns on invested capital, durable margins, pricing power, and internally generated cash flow should possess significant advantages. The age of indiscriminate cheap capital has ended.

XI. Artificial Intelligence: The Great Productivity Variable

Artificial intelligence may become one of the most important variables in the long-term economic outlook. In the short run, AI is creating enormous investment demand.

Data centers require:

semiconductors,

electricity,

construction,

cooling systems,

transmission infrastructure,

land,

engineering,

and capital.

That can create inflationary pressure.But the long-run effect could move in the opposite direction. If artificial intelligence materially increases worker productivity, firms may produce more output with fewer incremental resources.

The sequence could become:

AI Capital Expenditure → Productivity → Lower Unit Costs → Higher Potential Output → Disinflationary Capacity

This produces one of the central uncertainties of the next decade. Will the inflationary capital demands required to build the AI economy arrive faster than the productivity gains AI eventually creates?

The answer could materially affect economic growth, wages, inflation, corporate margins, and interest rates.

XII. Energy Has Returned as a Macro Variable

Energy must again be treated as a first-order economic variable.

Oil affects transportation.

Natural gas affects industrial production and electricity.

Electricity increasingly affects technology infrastructure.

Energy costs enter manufacturing, logistics, agriculture, construction, aviation, chemicals, and household expenditures.

Thus:

Energy Shock → Input Costs → Transportation → Production → Consumer Prices → Inflation Expectations

This is why geopolitical developments can quickly become economic developments.

An energy shock presents the Federal Reserve with an especially difficult problem because higher interest rates cannot create additional physical energy supply.

Monetary policy can destroy demand. It cannot manufacture barrels of oil or megawatts of electricity. Energy therefore remains one of the most important upside risks to inflation and downside risks to real household purchasing power.

XIII. The Menger Base Case

The September Menger Economic Outlook assigns the greatest conceptual weight to a scenario of resilient but constrained expansion.

Under this scenario:

economic growth remains positive;

manufacturing remains expansionary;

services remain relatively strong;

employment continues growing but unevenly;

inflation remains above ideal levels;

the Federal Reserve remains cautious;

long-term Treasury yields remain comparatively elevated;

credit remains available but expensive;

and businesses become increasingly disciplined about capital allocation.

This is neither boom nor recession.

It is a higher-cost-of-capital expansion.

That distinction is central.

XIV. The Bull Case: Productivity-Led Expansion

The most constructive scenario is a productivity boom. Artificial intelligence, automation, infrastructure investment, energy development, and industrial expansion could increase the economy's productive capacity. If productivity grows sufficiently rapidly, wages can rise without producing equivalent unit-labor-cost inflation.

Corporate margins can improve.

Real incomes can rise.

Inflation can decline.

The Federal Reserve can normalize monetary policy.

The economy can expand without overheating.

The sequence would be:

Investment → Productivity → Output → Real Income → Sustainable Consumption → Profits would represent the most favorable economic regime.The key variable is productivity.

XV. The Bear Case: Inflationary Constraint Becomes Economic Contraction

The principal downside scenario begins with inflation persistence. If inflation remains elevated, monetary policy may need to remain restrictive. If Treasury yields remain high simultaneously, economy-wide financing conditions could tighten further.

Credit then becomes the transmission mechanism.

The sequence would be:

Persistent Inflation → Higher-for-Longer Rates → Credit Tightening → Lower Investment → Weaker Hiring → Lower Consumption → Economic Contraction

This process would likely appear gradually.

Hiring could weaken before layoffs accelerate.

Credit spreads could widen before defaults rise.

Capital expenditures could decline before GDP contracts.

This is why leading indicators matter.

A recession should not be identified only after GDP becomes negative.

The objective is to identify the transmission process before the final outcome appears.

XVI. The Menger Economic Dashboard

The Menger Business Review will evaluate the outlook through five principal economic pillars.

Growth: GDP, ISM manufacturing, ISM services, industrial production, new orders, retail sales, and capital expenditures.

Labor: payrolls, unemployment, job openings, hiring, claims, hours worked, wage growth, and productivity.

Inflation: CPI, PCE, PPI, wages, energy, commodities, shelter, inflation expectations, and ISM prices.

Capital: Federal Reserve policy, 2-year Treasury, 10-year Treasury, 30-year Treasury, real yields, term premium, credit spreads, and lending conditions.

Risk: oil, geopolitics, fiscal borrowing, corporate defaults, commercial real estate, consumer credit, and market volatility.

No individual indicator determines the outlook.

The signal emerges from their interaction.

XVII. What Would Change the Menger Thesis?

A serious economic outlook must identify the evidence that would invalidate it.

The current resilient-expansion thesis would become substantially more bearish if several conditions emerged simultaneously:

employment growth deteriorated materially;

initial unemployment claims increased persistently;

services activity moved into contraction;

manufacturing new orders fell below expansion;

credit spreads widened significantly;

bank lending contracted;

consumer spending weakened materially;

and corporate earnings expectations declined.

Conversely, the outlook would become more constructive if:

inflation declined sustainably;

productivity accelerated;

real wages strengthened;

long-term Treasury yields stabilized;

credit spreads remained contained;

business investment increased;

and employment growth broadened.

The purpose of economic analysis is not to defend a forecast.

It is to update the forecast as the system changes.

XVIII. Conclusion: A Different Kind of Expansion

The American economy remains remarkably resilient.

That resilience deserves recognition.

Manufacturing continues expanding.

Services activity is strong.

Payroll growth recovered in August.

Unemployment remains relatively low.

Business activity continues.

The economy is not presently displaying the characteristics of a generalized collapse. But resilience should not be mistaken for a return to the previous economic regime.

Inflation remains persistent.

Price pressures remain visible across business surveys.

Government financing requirements remain substantial.

Energy and geopolitical uncertainty remain significant.

Long-term capital is expensive.

And the labor market contains important divergences beneath the headline employment figures.

The central Menger conclusion is therefore:

The economic expansion continues, but the rules governing the expansion have changed.

The economy is increasingly operating under a regime in which capital has a meaningful price.

That changes everything.

It changes corporate investment.

It changes housing.

It changes government finance.

It changes asset valuation.

It changes portfolio construction.

It changes business strategy.

And it increases the value of productivity, cash flow, balance-sheet strength, and disciplined capital allocation. The central question for the remainder of 2026 is therefore not simply:

Will the economy grow?

It is:

Can the economy grow fast enough to sustain prosperity, productively enough to restrain inflation, and efficiently enough to justify a structurally higher cost of capital?

That is the question the Menger Economic Outlook will continue to examine.

Because markets ultimately sit downstream from the economy. And before attempting to understand where markets are going, we must first understand the economic system producing them.

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