Markets perceive cooling in the US economy after a hot summer, with reduced odds of a September rate hike. But data suggests structural shifts rather than cyclical weakness. The labor market shows employment growth falling for four consecutive months, with the latest report erasing 100,000 jobs from May–June. However, unemployed workers per job opening remains flat at 1.0, and unemployment claims stay low. Reduced hiring appears supply-driven: the civilian labor force is 1.3mn workers smaller than last July while employment is 300,000 higher. Demographic change and 50,000 monthly deportations constrain supply.

Retail sales declined in July, but consumer spending's contribution to GDP has shifted. AI-adjacent investment now rivals personal consumption. Since 2022, consumption's contribution fell 50bps alongside household debt dropping from 63% to 58% of GDP. Federal borrowing rose from 103% to 108% of GDP. Households are crowded out by government and AI investment via higher rates.

The economy is constrained by supply (workers, AI inputs, loanable savings) not demand. 10-year and 30-year Treasury yields are up 70bps and 60bps since the war started. Real yields drive the increase, not inflation expectations. A Kevin Warsh factor appears in the five-year forward break-even, up 10bps. Equity indices sit at highs, financial conditions have loosened. It seems premature to forecast a break in the heat unless the Fed brings demand into better balance with supply.