Northwestern Mutual Warns Risks Are ‘Already Showing Up in the Data’

The U.S. economy is showing early signs of strain as the Federal Reserve balances persistent inflation with a weakening labour market, according to Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management.

In his latest note, Schutte said that while inflation remains elevated, “these risks have already begun to show up in the data,” pointing to softening consumer sentiment and slowing job creation.

The Bureau of Economic Analysis reported that the Fed’s preferred inflation gauge, the core personal consumption expenditures index, rose 0.23 percent in August, little changed from July, keeping annual core inflation at 2.9 percent, still well above the central bank’s 2 percent target.

At the same time, economic growth surprised on the upside, with the second-quarter GDP revised up to 3.8 percent. 

However, Schutte cautioned that the final stage of inflation “will be the most difficult,” warning that the full impact of tariffs and other cost pressures may not yet be reflected in the data.

Federal Reserve Chair Jerome Powell has shifted attention toward the labour market, describing it as “less dynamic and somewhat softer.” 

The Northwestern Mutual CIO noted that nonfarm payroll growth has slowed to an average of just 27,000 per month in recent months, while the diffusion index, a measure of how broadly job gains are spread, has remained below 50 percent for four consecutive months.

Schutte adds that consumer sentiment has also weakened. The University of Michigan index fell to a four-month low of 55.1 in September, with 65 percent of respondents expecting unemployment to rise. 

Schutte said the economy faces “wider-than-normal” risks, underscoring the need for diversified investment strategies amid persistent uncertainty.

“How should investors respond to this uncertain and odd period where risks from inflation are elevated at the same time the labor market appears to be weaking?,” asked Schutte. “As discussed in our Asset Allocation Focus, it has become clear that the ‘economic tails’, or the range of possible outcomes, are wider than normal.”