As students head back to the classroom, the markets are preparing for a few important tests of their own. This week brings a full slate of economic data that may help investors better understand the health of the economy, the direction of inflation, and what the Federal Reserve could do next.
Manufacturing: Showing Improvement
The week begins with encouraging news from the manufacturing sector. The July Institute for Supply Management Manufacturing PMI rose to 55.6, its strongest reading in more than four years. A reading above 50 generally indicates that the sector is expanding. New orders strengthened and manufacturing employment moved into expansion territory for the first time in nearly three years. At the same time, manufacturers continued to report elevated input costs and supply-chain pressures — a reminder that stronger economic activity does not necessarily mean inflation is in check.
Services: The Next Subject to Watch
Next up is information from the much larger services side of the economy. Services include industries such as healthcare, finance, transportation, hospitality, and professional services, so this report can provide a broader view of consumer and business activity.
Investors will pay particular attention to employment, new business activity, and the prices companies are paying. Continued strength would suggest the economy remains resilient. However, another elevated price reading could reinforce concerns that inflation is becoming increasingly sticky — improving in some areas but not quickly or consistently enough to give policymakers complete confidence.
Employment: Friday's Final Exam
The week concludes with the July employment report on Friday, August 7. The report will include job creation, the unemployment rate, wage growth, and revisions to earlier estimates.
This may be the most closely watched release of the week. A healthy labor market supports consumer spending and economic growth, but an unexpectedly strong report — especially one accompanied by faster wage growth — could also increase concerns about inflation and interest rates. A weaker report may ease some inflation pressure, although too much weakness could raise questions about the economy's overall momentum.
In other words, markets may react not only to whether the numbers are "good" or "bad," but also to what they could mean for future Federal Reserve decisions.
Inflation: Still Needs Improvement
Inflation has made progress from its earlier highs, but it has not disappeared. Higher oil prices, transportation expenses, wages, and other business costs can continue to work their way into consumer prices. Recent increases in energy prices and Treasury yields have added to uncertainty surrounding how long interest rates may need to remain elevated.
That uncertainty can create volatility as investors continually adjust their expectations. One report may suggest the economy is cooling, while the next points to renewed strength or persistent pricing pressure. Markets are forward-looking and their short-term reactions often reflect changing expectations more than a fundamental change in the long-term outlook.
Investor Conduct: Stay in Your Seat
Recent volatility has been most noticeable among technology and semiconductor companies, while other areas of the market have generally held up better. That is an important lesson in diversification. When one highly concentrated part of the market struggles, exposure to different company sizes, industries, and asset classes can help reduce reliance on a small group of investments.
Periods of uncertainty are uncomfortable, but they are a normal part of investing. Trying to jump in and out of the market based on each economic release can turn an ordinary market fluctuation into a costly mistake.
This week's market report card may contain a mixture of strong marks and areas that still need improvement. The best response is not to overreact to one test. It is to remain diversified, disciplined, and focused on the long-term financial plan.