September in Review
Business startup activity continues to rise and is expected to reach record levels over the coming year. The startup ecosystem has advanced through several distinct phases over the past decade, with each period producing higher levels of business formation. The first major increase was driven by the pandemic-era surge in entrepreneurship, while the latest wave has been led by retail, software, professional services, and a broad range of other industries. These trends align with recent evidence showing improved small business profitability. The biggest drivers have been tariff refunds, which provided short-term cash support, and easing input-cost inflation.
Consumer inflation remained elevated at 3.4% in August. Higher gasoline prices were the primary driver, making a significant contribution to the overall cost of living. Without the sharp increase in fuel costs, inflation would have only been 2.4%, a more moderate reading. As expected, the effect of tariffs continues to fade. Tariffs typically create a one-time jump in prices that lasts about a year, after which prices remain higher but stop accelerating rapidly unless other market forces intervene. Inflation is still running slightly ahead of wage growth, reducing purchasing power for many households. Looking ahead, the gap between wages and inflation will be an important indicator to watch. Consumer spending has remained resilient, but high fuel costs could force some households to cut back in other areas, creating a drag on economic growth.
The Federal Reserve raised interest rates for the first time since 2023 in an effort to contain inflation. The decision signals that policymakers remain concerned about inflation risks to the economy. Higher interest rates will likely increase borrowing costs for households and businesses, affecting credit cards, auto loans, mortgages, and corporate debt. Rising rates are also likely to place additional pressure on interest-sensitive industries such as real estate, construction, manufacturing, retail, logistics, and tech.
The economy added a solid number of jobs in August, rebounding from a slower pace of growth earlier in the summer. Hiring was led by restaurants, public schools, and construction. Meanwhile, the information industry continued to shed jobs, reflecting ongoing weakness in software development, computing infrastructure, and publishing. The unemployment rate remained low at 4.1% while wage growth eased to 3.1%, continuing a gradual return toward pre-pandemic norms.
Construction activity continued to soften. Residential construction remained a key source of weakness, driven by declining single-family activity. Nonresidential construction showed signs of stabilizing after weakening through the past year, though construction volumes were still slightly below year-ago levels.
Data centers have driven growth in the nonresidential construction space, with activity now at record levels. In fact, data center construction has increased more than 5x since AI went mainstream in late 2022. Power plant construction has also expanded, reflecting efforts to meet the electricity needs of data centers, along with public investment in highways and streets. However, much of the strength in nonresidential construction was offset by a steep decline in battery manufacturing plants as many projects launched in prior years have now been completed.
Industrial output continued its steady expansion in August, extending a recent streak of growth. A notable development is an acceleration in industrial equipment manufacturing. Early evidence suggests a new capital spending cycle may be taking shape, supporting equipment orders and sales, although it remains too early to know how long the trend will last. Metal manufacturing was mixed, with strong growth in aluminum and steel production offset by a sharp decline in copper smelting and refining. More broadly, manufacturing gains remain concentrated in industries tied to technology, geopolitics, and national security. Manufacturing employment is also beginning to recover after several years of declines, with industry headcounts posting a slight increase this year.
The US-Canada trade dispute intensified in September as both countries moved forward with new trade restrictions. Canada implemented previously announced retaliatory tariffs on US goods, while the US expanded its list of Canadian products subject to tariffs and announced a ban on additional imports.
Adding bans on top of tariffs is a meaningful escalation, as bans are a more disruptive impediment to trade. Tariffs raise costs while allowing trade to continue, whereas bans force supply chains to be restructured. The ban will apply to certain alcoholic beverages and dairy products, which account for only a small portion of bilateral trade. That limited scope may allow the White House to test the practical and legal durability of a ban before expected court challenges. The US also signaled that Bombardier could face future restrictions. Because Bombardier is a major Canadian aircraft manufacturer with substantial US exposure, a ban could disrupt North American aerospace supply chains and create spillover effects for the US industry.
While the US-Canada trade dispute applies to a small volume of cross-border trade, each escalation increases the risk of broader disruption.
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