U.S. Economy Is More Resilient—But the Inflation Problem Is Not Going Away

Growth, Employment, and Business Activity Are Holding Up. The Next Question Is Whether Inflation Will Allow Them To.

Menger Business Review

September 9th 2026

Abstract

The latest economic evidence presents a more resilient picture of the United States economy than appeared likely only several weeks ago. Nonfarm payroll employment increased by 162,000 in August, unemployment remained at 4.1 percent, manufacturing continued to expand, and services activity strengthened materially. These developments reduce the immediate probability that the economy is entering a broad contraction.

Yet the improvement in activity has been accompanied by another important signal: price pressures remain unusually persistent. Purchasing-manager surveys show elevated prices across both manufacturing and services, while the Federal Reserve continues to confront inflation above its long-run objective.

The emerging macroeconomic question is therefore changing. The principal issue is no longer simply whether economic growth can continue. Increasingly, it is whether the economy can sustain resilient demand without generating sufficient inflationary pressure to keep interest rates and the cost of capital structurally elevated.

I. The Economic Narrative Has Changed

Economic analysis must change when the evidence changes.

Only weeks ago, the deterioration visible in employment data raised legitimate questions about whether the United States was moving toward a more pronounced slowdown. July payrolls declined, earlier employment estimates were revised downward, and the broader labor-market trend appeared increasingly fragile.

The August data complicate that interpretation. Payroll employment increased by 162,000, while the unemployment rate remained unchanged at 4.1 percent.

Manufacturing continued expanding.

Services activity accelerated.

New orders remained strong.

Business activity increased.

The evidence consequently does not presently support a thesis of generalized economic contraction.But neither does it support an uncomplicated return to strong, noninflationary growth. The more significant development may instead be the emergence of a different economic configuration:

Resilient demand + improving activity + cautious hiring + persistent price pressure + elevated capital costs.

That combination deserves considerably more attention.

II. Employment Rebounds—but One Month Does Not Establish a Trend

The August employment report provided an important counterweight to July's weakness.

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

The rebound demonstrates why individual economic releases should rarely be interpreted in isolation.

July's weakness was meaningful.

August's recovery is meaningful.

Neither, by itself, defines the labor market.

The more important analytical question concerns the underlying trajectory of labor demand. The current evidence suggests that businesses have not broadly abandoned hiring, but neither have they returned to the extraordinarily tight labor conditions that characterized earlier stages of the economic cycle. This distinction becomes particularly visible when the payroll report is compared with business surveys.

The ISM Manufacturing Employment Index remained in expansion territory at 51.2 in August. Services tell a different story.

The ISM Services Employment Index registered 47.8, remaining in contraction for a second consecutive month even as overall services activity accelerated.

That divergence is important.

Businesses may be experiencing stronger demand without immediately translating that demand into proportionately stronger employment. Companies can respond to higher activity through productivity improvements, longer utilization of existing workers, automation, technology investment, delayed replacement hiring, or simply requiring existing operations to absorb greater workloads.

The implication is that the relationship between economic growth and employment may currently be changing at the margin. The labor market is stronger than July alone suggested. But it should not yet be characterized as unequivocally strong.

III. Manufacturing Remains in Expansion

Manufacturing provides another important indication that the American economy retains forward momentum. The August ISM Manufacturing PMI registered 54.6, marking the eighth consecutive month of manufacturing expansion.

Production remained particularly strong at 58.3.

New orders registered 53.7.

Manufacturing employment remained expansionary at 51.2.

These figures matter because manufacturing occupies a strategically important position within the economic system. Industrial activity influences transportation, energy consumption, commodity demand, capital expenditure, inventories, exports, employment, credit demand, and corporate investment.

Continued manufacturing expansion therefore provides evidence that underlying economic activity remains intact.

There are nevertheless signs of moderation.

The headline Manufacturing PMI declined from 55.6 in July to 54.6 in August.

New orders declined from 56.7 to 53.7.

Employment growth also moderated.

The appropriate interpretation is therefore not accelerating industrial growth.

It is continued industrial expansion at a somewhat slower rate.

That is still economically significant.

But another component of the manufacturing report may prove even more important.

Prices.

IV. Manufacturing Prices Remain Elevated

The ISM Manufacturing Prices Index registered 71.1 in August.

That was unchanged from July and represented the twenty-third consecutive month in which raw-material prices increased.

The underlying causes extend across several parts of the industrial economy.

Manufacturers continue reporting higher prices for metals, petroleum-related products, freight, electronic components, semiconductors, resins, and other industrial inputs.

Tariffs, energy costs, commodity conditions, and geopolitical disruptions are contributing to the pressure. This creates an important transmission mechanism.

Higher input costs → margin pressure → pricing decisions → consumer prices → inflation expectations → monetary policy → interest rates.

Companies initially have several ways to absorb rising costs.

They can accept lower margins.

They can improve productivity.

They can renegotiate supplier relationships.

They can reduce other expenses.

Or they can increase prices.

The longer input-cost inflation persists, however, the more difficult it becomes to prevent some portion of those costs from moving through the supply chain.

That is why the manufacturing price data deserve close attention.

The inflation problem does not begin with the Consumer Price Index.

It often begins much earlier in the production process.

V. Services May Be Sending the More Important Signal

The American economy is predominantly a services economy.

For that reason, the August ISM Services report deserves particular attention.

The Services PMI increased to 55.4, compared with 54.1 in July.

Business Activity rose to 61.7.

New Orders increased to 60.9.

Both indicate substantial demand.

The Business Activity Index reached its strongest reading since late 2022, while new orders approached similarly elevated levels. This is not the profile of an economy experiencing widespread demand destruction.

Services businesses are reporting substantial activity.

But there is a complication.

The Services Employment Index remained below 50.

And the Services Prices Index rose to 72.6.

That was its highest reading since August 2022.

The services economy is therefore exhibiting a particularly interesting combination:

Strong activity.

Strong new orders.

Weak employment diffusion.

Very strong price pressure.

This may be one of the most consequential macroeconomic signals currently available.

VI. Growth Without Hiring?

The divergence between services activity and services employment deserves deeper examination. If business activity is rising and new orders are increasing, conventional economic logic would eventually suggest additional labor demand.

Yet companies appear hesitant to expand payrolls aggressively.

There are several possible explanations.

Businesses may remain uncertain about future demand.

Labor costs may already be sufficiently high to discourage additional hiring.

Companies may be attempting to protect margins against higher input costs.

Technology and automation may be allowing businesses to generate additional output without proportional employment increases.

Or firms may simply be waiting for greater economic visibility before committing to permanent labor costs.

Whatever the explanation, the distinction matters for the broader economy.

Growth that does not generate sufficient employment can eventually become less supportive of household income.

But growth that occurs with greater productivity can improve corporate profitability and potential output.

Determining which process is dominating will therefore be important.

The August data provide evidence of resilience. They do not yet resolve the labor-market question.

VII. The Inflation Question Returns to Center Stage

For much of the recent economic debate, attention has focused on whether the Federal Reserve would eventually gain sufficient confidence in disinflation to reduce monetary restraint.

The latest activity indicators complicate that discussion.

Manufacturing prices remain elevated.

Services prices are accelerating.

Energy costs remain exposed to geopolitical risk.

Tariffs continue influencing portions of the industrial cost structure.

And economic demand has not collapsed.

This means the Federal Reserve may face a more difficult environment than one characterized by simple economic deceleration. Weak growth and falling inflation provide policymakers with a relatively straightforward response.

Strong growth and low inflation do as well.

The difficult scenario is different:

Growth remains resilient while inflation refuses to return sustainably toward target.

Under those conditions, monetary policy has substantially less room to become accommodative. That is why the inflation question is once again becoming central to the economic outlook.

VIII. The Federal Reserve's Real Problem

The Federal Reserve does not control the economy directly. It influences financial conditions primarily through the price and availability of money and credit.

The policy challenge is therefore to maintain sufficient restraint to restore price stability without imposing unnecessary damage on employment and economic activity.

The latest evidence makes that balance more difficult. A stronger labor report reduces immediate pressure for aggressive monetary accommodation. Stronger services demand provides additional evidence that the economy retains momentum.

Persistent price pressures argue for continued caution.

The result may be a monetary-policy environment in which investors repeatedly expect significant easing, only to discover that the underlying economy does not provide sufficient disinflation to justify it. This possibility matters well beyond Federal Reserve meetings. It affects the entire structure of capital costs.

IX. The Long End Matters

Businesses do not finance factories, acquisitions, commercial property, infrastructure, or long-term investments at the overnight federal funds rate.

They borrow against a capital-market structure ultimately influenced by longer-term Treasury yields. This is why the 10-year and 30-year Treasury markets remain central to the Menger Business Review's economic framework. If inflation remains persistent, investors may demand greater compensation for holding long-duration debt.

If federal borrowing remains large, Treasury supply may place additional pressure on yields.

If geopolitical risks increase energy prices, inflation expectations may become more difficult to contain. Consequently, the Federal Reserve could eventually reduce short-term interest rates without producing an equivalent decline in long-term financing costs.

This creates a crucial distinction:

Monetary easing does not necessarily mean cheap capital.

For businesses and investors, that distinction may define the next economic regime.

X. The Cost-of-Capital Economy

For more than a decade following the Global Financial Crisis, American businesses operated within an unusually favorable capital environment.

Interest rates were low.

Liquidity was abundant.

Discount rates were compressed.

Debt financing was comparatively inexpensive.

Asset valuations benefited.

That environment cannot be assumed to return automatically. If inflation remains structurally more persistent, fiscal borrowing remains large, and long-term Treasury yields remain elevated, businesses may need to operate in an economy where capital carries a permanently higher price than it did during the 2010s.

That changes corporate behavior.

Projects face higher hurdle rates.

Acquisitions become more difficult to justify.

Leveraged business models become less forgiving.

Refinancing becomes more consequential.

Working capital becomes more expensive.

Equity valuations face greater discount-rate pressure.

Cash-flow quality becomes more important.

Capital allocation becomes more disciplined.

In such an environment, financial management itself becomes a competitive advantage.

XI. The Economy Is Not the Market

Another important distinction must be maintained. A resilient economy does not automatically imply rising financial markets Likewise, weaker economic growth does not automatically imply falling markets. Financial markets price expectations.

If investors already expect strong growth, stronger economic data may have limited positive effect.

If stronger data simultaneously cause markets to expect higher interest rates, equity valuations can actually come under pressure.

The relevant relationship therefore becomes:

Economic data → inflation expectations → Federal Reserve expectations → Treasury yields → discount rates → asset valuations.

This is why economic interpretation matters.

The headline number is only the beginning of the analysis.

XII. Three Emerging Economic Scenarios

The current environment can be organized around three principal scenarios.

Scenario One: Productive Expansion

Economic activity remains strong while productivity improves sufficiently to contain labor costs and inflation.

Employment grows moderately.

Inflation gradually declines.

Long-term yields stabilize.

Corporate earnings remain healthy.

This would represent the most constructive outcome.

Scenario Two: Inflationary Resilience

Economic activity remains strong, but demand, energy costs, tariffs, wages, or supply constraints keep inflation elevated.

The Federal Reserve maintains restrictive policy longer than markets anticipate.

Long-term Treasury yields remain high.

Businesses face persistent capital-cost pressure.

This scenario increasingly deserves attention.

Scenario Three: Delayed Slowdown

Current economic strength proves temporary.

Higher interest rates, weakening hiring, consumer constraints, and restrictive credit eventually slow demand.

Employment subsequently deteriorates.

Inflation falls, but largely because economic activity weakens.

This remains the principal downside scenario.

The available evidence does not yet conclusively determine which regime will dominate.

But the balance of evidence has shifted.

Immediate recession risk appears less pronounced than July's data suggested.

Inflation persistence deserves greater attention.

XIII. What MBR Is Watching

The next several economic releases will be unusually important.

Consumer and producer inflation will provide evidence about whether the price pressures appearing in business surveys are moving further through the economy.

Employment data will reveal whether August's payroll rebound represents renewed labor-market strength or simply monthly volatility.

Treasury yields will show how bond investors interpret the combination of economic resilience, inflation, fiscal borrowing, and monetary policy.

Credit spreads will indicate whether financial markets perceive increasing corporate stress.

Oil and energy markets will remain important because geopolitical developments can rapidly transmit into transportation, manufacturing, household expenditures, and inflation expectations.

And the ISM employment components will help determine whether strong business activity eventually produces stronger hiring.

No single indicator will answer the economic question.

The relationships among them will.

XIV. Conclusion: Resilience Changes the Question

The United States economy has demonstrated greater resilience than recent weakness initially suggested.

Payroll employment rebounded.

Unemployment remained stable.

Manufacturing continued expanding.

Services activity strengthened considerably.

New orders remain healthy.

These are meaningful economic signals.

But they do not eliminate risk.

They change its character.

The immediate question is becoming less about whether the economy is suddenly falling into recession and more about whether continued economic resilience can coexist with sustainable disinflation.

That distinction is critical.

If growth continues while inflation declines, the economy may achieve something close to a controlled normalization.

If growth continues while inflation remains persistent, the Federal Reserve's room for accommodation will remain limited and long-term capital costs may remain elevated. And if higher capital costs eventually overwhelm household and corporate resilience, today's strength could become tomorrow's slowdown.

The current economic signal can therefore be summarized as:

Growth remains resilient.

Hiring remains uneven.

Price pressure remains elevated.

The cost of capital remains central.

The next phase of the U.S. economic cycle will be determined by how those forces interact.

At the Menger Business Review, that interaction—not any isolated headline—is where we believe the real economic story resides.

Menger Business ReviewIdeas • Analysis • Insight

Economic data referenced reflect information available as of September 9, 2026 and remain subject to revision.