Consumer confidence is top of mind at our firm. That one indicator (actually two, one from the University of Michigan and the other from The Conference Board) says more about the state of our economy than any other metric or indicator that we track and study. But something very curious has happened recently, and for the first time: consumer confidence is waning, yet consumers still have their wallets open and continue to spend.
I have written on this topic many times because it is so important. Going back to the 1960s, one trend that has repeated over and over is that a falling confidence over a period of months, sometimes even weeks, can cause consumers to freeze up their wallets, and that all-important consumer spending slows or stops, and recessions follow.
And it can happen suddenly: 9/11 is a perfect example, when consumer confidence plunged within a matter of days, and a sharp, but short, recession followed. Confidence and spending are inevitably joined at the hip.
Diverging
So, for the first time, consumer confidence and consumer spending are diverging and the economy continues to chug into an expansionary mode. While consumers grouse about the war with Iran, prices at the gas pump, unhappiness with the current administration and the bite of inflation, they are nonetheless keeping their pocketbooks open. The 70% of GDP that the consumer represents has slowed slightly, but is still strong.
A major driver of that confidence is the job market. The strength of employment acts as a positive force on the consumer, as they see their companies continue to hire and fill positions as the overall economy continues to expand.
So then comes the blockbuster news about the job market in August: employers added 162,000 jobs, nearly triple the 55,000 economists expected. The number beat all 76 forecasts among surveyed economists, and it was the biggest August upside surprise versus consensus in data going back to 1998. Job growth surged and the unemployment rate held steady, suggesting the labor market has more momentum than previously thought, and the unemployment rate remained steady at 4.1%.
The report indicates the labor market is powering through uncertainty from the Iran war and pressure from inflation, and the Federal Reserve saw this news as further evidence that raising interest rates was a necessary move to cool inflation.
Broad Advance
The broad advance in payrolls was led by a rebound in leisure and hospitality employment following big declines in June and July. Local government education also added about 42,000 jobs following outsize cuts last month. That category can be volatile in the summer as many teachers fall off of payrolls before returning again as the school year begins.
Manufacturing payrolls rose by the most since 2023, while construction firms added the most jobs since January. Many economists have pointed to the data-center buildout as a driver of demand for construction labor this year.
The financial activities and information sectors, both of which are seen as particularly exposed to AI-related job displacement, shed a combined 34,000 positions. The participation rate, which is the share of the population that is working or looking for work, edged up to 61.6% in August, marking the first improvement in almost a year. The increase was apparent across both younger and older workers, as participation for those ages 25 to 54, also known as prime-age workers, was unchanged at 83.4%.
A decline in participation in 2026, partly reflecting an aging population and the Trump administration’s immigration crackdown, has helped keep the unemployment rate low. Average hourly earnings rose 0.3% from July and 3.1% from a year earlier, the slowest since 2021. At the same time, an increase in average hours worked to the highest in more than two years helped lift weekly pay, which could support consumer spending in the months ahead.
Positive job news powers the consumer, as they take comfort in knowing the economy is stable, and that drives the inclination to open their wallets and continue to spend. This flows through to construction spending and the attendant demand for aggregates.