Defying Headwinds, the U.S. Economy Continues to Flex Its Resilience

We believe that there is nothing more fundamental and reflective of economic health than the employment situation, and the latest data reflects an economy showing persistent growth. After July's disappointing payroll print, the August employment report rebounded strongly. Nonfarm payrolls jumped 162,000, roughly three times consensus expectations, while June and July were both revised meaningfully higher (June to +31,000 and July from a negative reading to +21,000). Taken together, the average monthly employment data now shows an economy adding jobs at a healthier clip than the initial headlines suggested while getting back to a more normal pace of jobs gains.

The August report also provided a useful reminder of why we should resist reading too much into any single monthly report and instead look at trends, revisions, and corroborating data to judge the labor market's true state. The details reinforce this message. The labor force participation rate rose to 61.6%, its strongest level in roughly a year, meaning more people were pulled off the sidelines even as the unemployment rate held steady at 4.1%. Average hourly earnings rose 0.3% month-over-month, which was in line with expectations. More telling is the U-6 rate that captures the underemployed and those working part-time who would prefer full-time work. This gauge of underemployed has been trending down from 8.7% in November 2025 to 7.7% in August. Since labor force growth remains slow, even modest hiring gains can meaningfully tighten the market at the margins. We view this combination of firm demand and stabilizing supply as evidence of an economy still expanding.

Not every signal is as encouraging. Real personal income excluding transfer receipts, an inflation-adjusted measure of income from wages, investments, and proprietors excluding government support, fell 0.38% year-over-year in July, its fifth consecutive negative reading. This decline is modest in aggregate but masks the more acute strain at the lower end of the income spectrum, an area we continue to watch closely.

Meanwhile, business sentiment is quietly improving. The JP Morgan Global Composite Purchasing Manager Index (PMI) points to the fastest growth in over two years, and survey-based business uncertainty trackers have fallen sharply from April's highs, though they remain above their long-run average. Globally, growth in the services sector was led by the financial sector, while consumer spending also increased from the war-related slowdown we experienced in the second quarter. Domestically, the ISM Services PMI climbed to 55.4 in August, which indicates strong expansion, marking nine consecutive months above 53. Business activity and new orders both accelerated to multi-year highs as well.

In aggregate, we expect continued positive economic momentum, which could lead to strong corporate earnings and higher equity markets. At the same time, interest rate risk has been a headwind for bonds though our Strategies remain overweight equities compared to bonds. Within our equity exposure, we continue to favor U.S. equities over foreign. As with the broader equity market, information technology remains our largest equity sector, and we see tactical opportunities in financials (regional banks) and health care. Regarding our fixed income allocations, we prefer holdings in the belly of the yield curve to take on somewhat less interest rate risk than the aggregate bond index. We continue to favor high-quality asset-backed securities and corporate bonds and are underweight U.S. Treasuries. Finally, our alternative allocations emphasize multi-asset real return and options overlay strategies.