The US labor market showed little change last week, with unemployment claims rising only slightly as layoffs stayed low. That stability gives the Federal Reserve more room to focus on inflation. At the same time, higher input costs across the services sector are adding to concerns that inflation may remain above the central bank’s 2% target.

The latest data also point to strong domestic demand. Consumer spending remains firm, while heavy investment linked to artificial intelligence is putting pressure on supply. These forces could keep prices high even as the job market loses some momentum.

Jobless Claims Stay Low

Initial claims for state unemployment benefits rose by 2,000 to a seasonally adjusted 206,000 for the week ended August 29, according to the Labor Department. Economists surveyed by Reuters had expected 205,000 claims.

The number of people continuing to receive unemployment benefits also increased. Continuing claims rose by 8,000 to a seasonally adjusted 1.779 million for the week ended August 22.

Economists continue to describe the labor market as being in a “slow hire, slow fire” phase. Companies appear cautious about adding workers, but widespread layoffs have not emerged.

A separate report from global outplacement firm Challenger, Gray & Christmas showed that planned job cuts by US-based companies climbed 58% to 52,881 in August. Even so, August recorded the lowest number of planned cuts for that month since 2022. Announced layoffs for the year are also down 41% from the same period last year.

The Federal Reserve’s Beige Book offered another sign of a stable labor market. The report said employment rose “very slightly” in August. It also noted that healthy labor demand appeared most often in manufacturing, construction, and some service industries. Retail and hospitality, however, saw weaker demand for workers.

Instagram | caltransdist3 | The Fed’s Beige Book showed stable labor growth in August, led by manufacturing, construction, and services.

Fed Faces Inflation Pressure

Inflation remains a major issue for Federal Reserve officials. An Institute for Supply Management survey showed that prices paid by services companies for inputs rose sharply in August.

The index climbed to 72.6, up from 70.3 in July. That marked its highest level since August 2022. Economists said the increase suggests that price pressure is spreading beyond goods and remains active in services.

Higher prices have led some economists to expect the Federal Reserve to raise interest rates before the end of the year. Still, Fed Governor Christopher Waller said at a Reuters NEXT Newsmaker event that he would lean toward keeping rates unchanged this month if upcoming economic data show that inflation is cooling.

Stephen Brown, chief North America economist at Capital Economics, said, “The latest surveys offer support for the idea that the Fed will soon raise interest rates.” He added that Waller’s comments point to a decision that will depend heavily on the next consumer and producer price reports.

Brown said the upcoming CPI and PPI data will play a major role in determining the Fed’s next move.

Hiring Data in Focus

The government was expected to release the August employment report on Friday. A Reuters poll of economists projected a gain of 56,000 nonfarm jobs after payrolls fell by 23,000 in July.

The unemployment rate was expected to remain at 4.1%.

Part of the expected job rebound could come from local government education payrolls. However, some economists said another month of job losses remained possible. The recent end of Temporary Protected Status for hundreds of thousands of Haitians could also affect employment because it changed their work authorization.

August payroll reports often come in below expectations. Still, economists said the Federal Reserve could keep a rate increase under consideration if the labor market avoids a clear downturn.

Domestic Demand Remains Strong

The services data showed that demand remains firm. New orders received by services companies rose to 60.9 in August from 57.2 in July. That was the highest reading since February 2023.

The ISM nonmanufacturing Purchasing Managers’ Index also increased. It reached 55.4, compared with 54.1 in July. A reading above 50 signals growth in the services sector.

Services account for more than two-thirds of US economic activity, making the increase important for the wider economy. Strong demand can support growth, but it can also keep pressure on prices when supply cannot keep up.

Artificial intelligence investment has added to that demand. Companies are buying computers, semiconductors, and other equipment as they expand AI-related operations.

Trade Deficit Widens

Strong domestic demand is also pulling in more imports. The US trade deficit increased 24.4% in July to $88.6 billion, according to data from the Commerce Department’s Bureau of Economic Analysis and Census Bureau.

Imports rose 2.8% to $399.3 billion. Goods imports increased 3.7% to $320.6 billion. Capital goods imports jumped $14.4 billion to a record $140.3 billion, helped by higher purchases of computers, computer accessories, and semiconductors linked to AI investment.

Industrial supplies and materials imports fell by $1.8 billion. Crude oil imports also declined by $1.8 billion as oil prices moved lower.

Exports fell 2.1% to $310.7 billion. Goods exports dropped 3.0% to $201.0 billion, led by an $8.7 billion decline in industrial supplies and materials. Crude oil and nonmonetary gold accounted for much of that decline.

Capital goods exports increased by $1.9 billion, while consumer goods exports rose $1.7 billion due partly to stronger pharmaceutical shipments.

Trade Could Weigh on Growth

Instagram | portauthorityja | A widening US goods trade deficit in July threatens to further drag down national economic growth.

The goods trade deficit widened 17.3% to $119.6 billion in July. After adjusting for inflation, the deficit rose 12.7% to $106.4 billion.

That increase could create another drag on economic growth. Trade reduced US GDP growth by 1.14 percentage points in the April-June quarter. The economy grew at a 1.5% annualized rate during that period.

Services trade also softened. Services imports fell $0.6 billion to $78.7 billion, while services exports slipped $0.4 billion to $109.7 billion. Lower imports of intellectual property and transport services contributed to the decline, while travel service imports increased.

Despite higher tariffs, the US recorded record goods trade deficits with Mexico, Vietnam, Taiwan, Thailand, South Korea, and Malaysia. The trade balance with Switzerland shifted into a deficit. Meanwhile, the US deficit with Canada narrowed by $3.7 billion to $3.2 billion as the two countries remained involved in a trade dispute.

Christopher Rupkey, chief economist at FWDBONDS, said, “The best quarters for real GDP growth under the Trump administration in the middle of 2025 were boosted by the trade deficit falling sharply, but now the shoe is on the other foot and economic growth in the current quarter will be restrained by the jump in net exports.”

Inflation and Growth Remain Linked

The latest figures show an economy with mixed signals. Hiring remains subdued, but layoffs are still limited. Services demand continues to grow, while higher input prices could keep inflation elevated.

For the Federal Reserve, the next CPI and PPI reports will carry added weight. If price pressures remain strong without a major labor market decline, another rate increase could stay on the table. At the same time, weaker hiring and rising trade-related pressure could make policymakers more cautious.

The US labor market remains broadly stable, but inflation continues to create uncertainty for the Federal Reserve. Low layoffs offer support, while strong services demand and higher input prices point to persistent price pressure.

The widening trade deficit adds another challenge for economic growth. Together, these trends leave upcoming inflation and employment data as key signals for the Fed’s next interest rate decision.