Everyday Economics: Fed caught between persistent inflation, cooling jobs market

Next week's calendar is packed with major economic reports and influential Fed speeches. However, expect continued mixed signals, with data spanning manufacturing, construction, and the jobs report. Here's what to watch:

Construction Spending: A Temporary Setback or the Start of the Downturn?Spending on construction projects surprised to the upside at the end of 2024, driven primarily by a rebound in residential construction. In December, residential construction spending reached an annualized $939.5 billion — 1.5% (±1.3%) above November's revised $925.5 billion estimate. This aligns with the strong rebound in housing starts at the end of 2024.

However, January's unusual winter freeze is expected to dampen spending. That said, anticipation of new tariffs may have pushed some investment forward, mitigating the expected decline — despite the drop in housing starts for January. At the same time, persistently higher mortgage rates and a decline in the number of homes under construction could mean that residential spending may have already peaked and could be headed lower in 2025.

Manufacturing & Services: Growth, But Slower

The ISM Manufacturing and Services reports are expected to show continued expansion, albeit at a slower pace. These reports will be key in assessing whether the economy's growth momentum is fading.

Fed Speeches: Powell & Waller Take Center StageSeveral Federal Reserve officials will speak this week, but the real focus will be on Fed Governor Christopher Waller and Fed Chair Jerome Powell.

Waller, a respected voice on monetary policy, inflation and financial markets, is known for his academic rigor and market-moving insights. Investors will be watching closely for any clues on inflation and his economic forecast.

Powell's remarks will likely reinforce the Fed's stance on interest rates, with markets eager to discern whether policymakers remain committed to a pause or if the Fed will soon resume its rate-cutting cycle.

Policy Uncertainty & Labor Market RisksPolicy uncertainty has been on the rise. The U.S. economy continues to grapple with persistent inflation while fears of a slowdown have re-emerged.

Shocks related to policy uncertainty act as negative supply shocks — raising prices while simultaneously dampening household consumption and business investment.A pullback in business investment could result in lower hiring rates, setting the stage for this week's main event: The Bureau of Labor Statistics Employment Situation Report.

The Jobs Report: Cooling, But Still StrongThe February jobs report is expected to reflect a still-resilient but gradually cooling labor market:

The four-week moving average of initial jobless claims — a proxy for flows into unemployment — rose from 217,000 at the start of February to 224,000 by month-end. While still low, this suggests a gradual loosening of the labor market.Residential construction sector hiring is expected to continue moderating, reflecting higher financing costs but also higher vacancy rates and cooling rents.Federal government hiring is also expected to fall with recent layoffs adding to overall unemployment.Declining labor demand should lead to easing wage growth and a slight uptick in the unemployment rate.

Bottom LineWith Waller and Powell's speeches in focus, along with the latest jobs data, the market will be looking for signals on how the Fed navigates an economy caught between persistent inflation and softening labor demand.