Stagflation: 5 Signs That Economy’s Worst-Case Scenario Is Inching Closer

Stagflation anxiety is back.

Concerns about stagflation — a dreaded scenario where the economy grows sluggishly while inflation remains stubbornly hot — have ebbed and flowed on Wall Street in recent months. But fears about such a scenario has started to creep back on the radar of investors, thanks to a growing pile of evidence that suggest stagflation could be on its way.

Stagflation, often dubbed the worst-case scenario for the US economy, is thought to be even more difficult for policymakers to resolve than a typical recession. That’s because hotter inflation means the Fed is unable to lower interest rates to boost economic growth, as the central bank would in a typical recession.

In a note to clients on Thursday, Bank of America said the Fed’s path forward looked “bimodal,” given risks swirling around stagflation.

BCA Research, meanwhile, said it was worried about it over the next year.

“Over a 12-month horizon, we are more concerned about the ‘stag’ part than the ‘flation’ part of stagflation,” Peter Berezin, the chief global strategist at the firm, wrote in a report, pointing to the inflationary and potential growth impacts of President Donald Trump’s tariffs. “A Mini-Stagflation Is Brewing,” he later added.

Here are four warning signs market-watchers were eyeing this week:

1. Job growth dropped way below expectations

The US job market continued to disappoint, with the economy adding 22,000 jobs for the month of August. That compares to the 75,000 payrolls economists were expecting, and the 79,000 jobs the economy added the prior month.

“Job growth is clearly signaling a slowdown in the economy. Even factoring in concerns about data accuracy, the latest BLS figures are now aligning with what other surveys and data providers have been indicating for months,” Kevin O’Neil, a senior research analyst at Brandywine Global, wrote in a note.

2. Private employment fell short

Employment in the private sector also stumbled. Private employers hired 54,000 workers in the month of August, according to the latest ADP jobs report, lower than the 75,000 economists were expecting.

Private job growth for the month also fell way below last month’s levels, when private employers hired 106,000.

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“The evidence of significant labor market slowing continues to mount,” Scott Anderson, the chief US economist at BMO, wrote in a note to clients on Friday.

3. Joblessness crept higher

New filings for unemployment benefits rose to 237,000 in the week ending August 30, the Labor Department said on Thursday. That was the highest number of weekly jobless claims filed since June, and beat economists’ estimates of 230,000 applications.

The unemployment rate also ticked up to 4.3% from 4.2% in August, per the latest jobs report. The overall jobless rate remains near historic lows, but it’s the highest rate of unemployment the economy has seen since 2021.

4. Manufacturing contracted while prices rose

The manufacturing sector just logged its sixth-straight month of contraction, with the Institute for Supply Management Manufacturing PMI coming in at 48.7% for the month of August.

The Prices Index component, meanwhile, remained in expansionary territory at 63.7%. The index has climbed around 11 percentage points over the last nine months, largely rising material costs, the ISM said. It pointed in particular to steel and aluminium, which are impacted by tariffs.

5. Services prices rose

The Prices Index of the ISM’s Services PMI came in at 69.2%. That suggests that services prices in the economy are still rising, though the prices component of the PMI cooled slightly from last month’s 69.9% reading.

The reading is the second-highest recorded since 2022, and marks the ninth-straight month that the prices component of the Services PMI came in above 60%, the ISM said.

The index reading is also consistent with the idea that services inflation could re-accelerate in the coming months, Oliver Allen, a senior US economist at Pantheon Macroeconomics, wrote in a note.

“For now, we retain our view that weak wage growth and downward pressure on margins from subdued demand will mean core services inflation remains contained. But the risks to that view probably lie to the upside,” he said.