Is September's Economy Resilient, or Turning Stagflationary?

Three reports arrived in five days, and they refuse to agree. Friday’s jobs report showed hiring almost stopped. This morning’s survey of service companies showed the sector still growing. Underneath both ran the same thread: the prices businesses pay are rising fast. Put those pieces together and the market is left with a hard question. Is this an economy that keeps expanding while it absorbs higher costs, or one edging toward the blend of weak growth and stubborn inflation that carries the name stagflation?

Both readings have support.

Twenty-seven months of expansion, and counting

The service sector, which employs most American workers, grew again in September. The Institute for Supply Management’s services index registered 54.9%, its 27th straight month above the 50 mark that divides growth from contraction. New orders held at 59.8%, a reading that points to real forward demand. Business activity stayed firmly expansionary at 56.5%, and on the factory side production rose to 56.7%. The manufacturing index itself came in at 54.5%, a ninth consecutive month of growth, with new orders climbing to 55.3% and order backlogs jumping more than four points. ISM counts the wider economy as having expanded for 23 months running.

Hiring within the surveys even firmed. The services employment gauge climbed back to 50.1% after two months below water, and the factory employment reading rose to 52.7%. Services order backlogs edged up to 56.6%, a sign the work is not thinning out. Investors were unbothered. The Nasdaq finished Friday at a record high and the S&P 500 added 0.4%, while the market’s main volatility gauge stayed subdued below 16.

Input costs at a three-year peak

Read the same reports on prices, and the tone darkens. The services prices index hit 74.0%, the highest since July 2022. In manufacturing the jump was steeper: the prices gauge surged 6.8 points to 77.9%, near the peak it reached in March at the start of the Iran war, and not a single industry reported paying less for raw materials. Companies across both surveys pointed to tariffs, diesel and freight bills, and higher borrowing costs weighing on construction. One services respondent told ISM that higher interest rates had driven buyers out of the housing market, with many no longer able to qualify for a purchase.

The labor side looks worse. September payrolls grew by just 29,000, far short of the 84,000 economists expected, and the unemployment rate rose to 4.2%. Hiring over the prior year had already cooled to an average near 45,000 a month. Some service firms told ISM they were trimming roles as they restructured around new software tools. When prices accelerate while job growth fades, a central bank is boxed in, because easing to help the labor market risks feeding the very price pressures already building.

What the data shows

The tape mirrors the split. Friday’s close left the S&P 500 at 7,754 and the Nasdaq at a record 27,388, while the Dow slipped on the day. Consumer-discretionary and technology shares led, each up more than 1% on Friday, while energy was flat. Materials and industrial shares also closed higher on the day. That leadership usually signals faith in growth. Yet the 10-year Treasury yield sat at 5.24%, high by the standards of the past decade and a sign bond investors still price in inflation risk. The services survey itself came in just under the 55.0 that forecasters penciled in, and its business-activity component dropped more than five points from August. Even the growth story softened at the margin.

What would settle it

Three dates will test both cases. Minutes from the Federal Reserve’s last meeting land October 7 and should reveal how officials weighed the same tension. The September Consumer Price Index follows on October 14, the first hard inflation figure to confirm or soften what the business surveys implied. The Fed’s next rate decision comes October 28; after Friday’s weak payrolls, futures markets moved to price in a strong chance that policymakers leave rates unchanged. The next monthly ISM surveys, due in early November, will then show whether September was a blip or the start of a trend. Each release answers a different half of the question, and together they will show which of September’s two signals the next month bears out.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.