The signs have been there for some time. The US labour market has shown few signs of weakening in spite of higher interest rates. US employers added another 187,000 jobs in August, the same as in July and ahead of economists’ expectations. The consumer appears buoyant, defying any squeeze on household incomes, while the two large fiscal spending programmes – the Chips and Science and Inflation Reduction Acts – are galvanising spending in key parts of the economy, such as construction.

Certainly, there are areas that still look weak: housing is a notable tough spot, with mortgage rates hitting new highs. Manufacturing also looks feeble, with PMI data contracting for a 10th straight month in August. However, some economists believe that both housing and manufacturing are bottoming-out. The declines are slowing and companies are starting to rebuild inventories.

This is important because it could derail the narrative that inflation is tamed. If the US economy bounces back before inflation is firmly back in its box, interest rate rises become a possibility again. This would be difficult for markets to digest, having just got used to the idea that the interest rate cycle was turning. 

To date, markets have stubbornly ignored the potential for a stronger US economy, but this week they could no longer overlook rising bond yields. Services sector data came in stronger than expected, with the Institute for Supply Management (ISM) saying its non-manufacturing Purchasing Managers’ Index rose to 54.5 last month against expectations of 52.5. Input costs for services also appear to be increasingly. Investors fretted that sticky inflation could see interest rates stay higher for longer.

It is early days, and the strength of the US economy is by no means assured. Credit conditions continue to weaken, and it is plausible that the consumer starts to run out of money, particularly at the lower end. However, for a long time economists’ fears have been pointed in one direction – they now need to be aware of a broader range of risks.