Insights 
VT 
Goldman Sachs has adjusted its Q3 US GDP estimate from 1.6% to 1.7%. This revision reflects changes in various economic indicators observed in recent reports.
Manufacturing Reports
In August, the ISM manufacturing index showed smaller increases than anticipated. The report was mixed, with new orders and employment rising, but a drop in production. Meanwhile, the S&P Global manufacturing PMI was revised downwards in its final reading for August.
July’s nominal construction spending decreased as expected, implying a 0.5% decline when adjusted for inflation. However, the specifics of the construction spending report were slightly better than previously anticipated by Goldman Sachs.
Consequently, Goldman raised its Q3 GDP tracking estimate by 0.1 percentage points to 1.7% annualized. The domestic final sales estimate was also increased by the same amount, reaching 0.7%.
Further economic reports such as ISM services and non-farm payrolls are expected soon. These upcoming reports could significantly alter expectations for the actual Q3 GDP outcome.
Federal Reserve and Market Volatility
The slight upward revision in our third-quarter GDP tracking to 1.7% is noted, but the details show a weak foundation. We see softness in manufacturing and a real decline in construction spending, which tempers any real optimism. This suggests an economy that is growing but lacks strong momentum heading into the fall.
Given this sluggish picture, the Federal Reserve is likely to remain on hold. Looking back at the persistent inflation we saw over the summer, with the July 2025 CPI data showing a sticky 3.3% year-over-year increase, a rate cut is not on the table either. Therefore, derivatives pricing in a change in the Fed funds rate for the upcoming meeting appear misaligned with the current economic reality.
We should anticipate a rise in volatility, as the market is sensitive to every new piece of information. With the August non-farm payrolls report having recently shown a slight cooling with 165,000 jobs added and an unemployment rate ticking up to 4.0%, all eyes are now on the upcoming ISM services report. The CBOE Volatility Index, or VIX, is currently hovering around 16, a level that may not fully price in the potential market swings from this week’s data.
This economic environment suggests a divergence between sectors. The ongoing weakness in manufacturing, a trend we also observed through parts of 2024, contrasts with the relative stability expected from the services sector. Traders could structure positions that favor services-related indexes over industrial ones, perhaps using options spreads to capitalize on this performance gap.
