Two reports out Friday handed the U.S. economy a split decision — and both landed on the desk of a Fed chair about to deliver the biggest speech of his tenure. The Chicago Business Barometer collapsed to 47.1 in August, a 10.5-point nosedive that shoved regional manufacturing into contraction for the first time since April. The University of Michigan, meanwhile, confirmed consumer sentiment stayed stuck near its recent lows at 51.7 — with one genuine bright spot: households now expect a little less inflation over the next year.
The Numbers
- Chicago PMI: 47.1 in August, down from 57.6 in July — a 10.5-point drop, far below the roughly 58 consensus (ISM-Chicago, via Trading Economics). Anything under 50 signals contraction.
- Michigan consumer sentiment: 51.7 final, down 6.3% from July’s 55.2 and 11.2% below a year ago (University of Michigan).
- Current conditions: 51.9, down from 54.8. Expectations: 51.5, down from 55.4 (University of Michigan).
- Year-ahead inflation expectations: 4.0%, down from 4.2% in July (University of Michigan).
- Long-run inflation expectations: 3.3%, unchanged for a third straight month (University of Michigan).
- September rate-hike odds: roughly 35%, with a hike fully priced in by December (CME FedWatch, via Reuters).
The Surprise Is on the Factory Floor
The Chicago PMI is the number nobody saw coming. Manufacturing had been holding its own — July’s 57.6 was comfortably expansionary — so a 10.5-point collapse in a single month is a genuine red flag. It’s a regional gauge, and a famously noisy one, so the smart move is to wait for the national ISM manufacturing index, which lands Monday. But the direction is hard to spin: one of the economy’s steadier pillars just wobbled.
Keep the caveat front and center, though. The Chicago Barometer swings harder than the national survey, and a single month can overstate the trend. What matters is whether the contraction shows up when the ISM report lands at 10 a.m. Eastern on Monday. If it does, the manufacturing side of the economy — which has quietly held up all summer — suddenly looks a lot more fragile.
The Silver Lining for the Fed
The Michigan report carried the morning’s one genuinely good data point for the Federal Reserve. Year-ahead inflation expectations ticked down to 4.0% from 4.2%, and long-run expectations held firm at 3.3% for a third straight month. That anchoring is what the Fed cares about most — if households stop expecting prices to keep running hot, the central bank gets room to stay patient. The sentiment itself is still ugly. Survey director Joanne Hsu said the declines hit every political group, and landed hardest on older, lower- and middle-income households and people without stock holdings. The Iran conflict is a culprit, too: consumers are bracing for higher gas prices in the short and long run.
Warsh Takes the Stage
All of this unfolded in the hours before Kevin Warsh stepped up for his first Jackson Hole keynote as Fed chair. The setup was already tense. Two colleagues — Cleveland’s Beth Hammack and Kansas City’s Jeff Schmid — used the eve of the speech to warn that inflation is still too hot and policy too loose. Warsh, who has resisted the explicit forward guidance his predecessors leaned on, walked in with an awkward assignment: calm a jittery bond market without promising anything specific.
Market Reaction
- Stocks: The Nasdaq led the week higher, up more than 1.5%, after Nvidia’s blowout earnings — but the tape flattened into Friday’s speech.
- Bonds: The 30-year Treasury yield sat near 5.20% and the 10-year near 4.68%, both lower on the week after the Treasury’s buyback intervention.
- Oil: Brent crude eased toward $89, on course for a weekly drop of more than 5% as Iran–Oman Strait of Hormuz tensions cooled.
- Rate futures: About a 35% chance of a September hike, with a hike fully priced in by December (CME FedWatch).
Bottom Line
The data hands Warsh a genuinely mixed deck: a contracting factory sector and a gloomy consumer on one side, easing inflation expectations on the other. That is roughly the same split the Fed has been wrestling with all summer. The next few days sharpen the picture fast — the national ISM manufacturing report drops Monday, and the August jobs report follows on Friday. If the Chicago collapse bleeds into the national numbers, those September-hike odds sitting near one in three will move in a hurry.