The Weakening US Economic Momentum: Implications for Investors

The U.S. economy is showing troubling signs of deceleration, with leading indicators pointing to a sharp slowdown in momentum. According to a report by The Conference Board, the Leading Economic Index (LEI) for the U.S. fell by 0.5% in August 2025 to 98.4, marking the largest monthly decline since April 2025 and a cumulative 2.8% drop over the past six months The Conference Board Leading Economic Index® (LEI) for the US^[1]. This deterioration outpaces the 1.3% decline seen in the first half of 2024, signaling a deepening structural slowdown. The diffusion index of the LEI, a critical recession signal, has remained below 50 for three consecutive months, raising alarms even as the Conference Board stops short of predicting a full-blown recession The Conference Board Leading Economic Index® (LEI) for the US^[1].

Sector-Specific Weakness and Tariff Headwinds

While the ISM Services Index expanded to 52% in August 2025—the highest level in six months—key subcomponents reveal a mixed picture. The Business Activity Index and New Orders Index surged to 55% and 56%, respectively, but the Employment Index contracted for the third straight month at 46.5%, and the Prices Index hit a seven-month high of 69.2%, underscoring persistent inflationary pressures ISM Services PMI: Strongest Growth in Six Months^[2]. Meanwhile, the ISM Manufacturing New Orders Index briefly rebounded to 51.4 in August after a July contraction, but this follows a broader trend of tariffs dampening demand TD Economics - U.S. ISM Manufacturing Index^[3].

Tariffs, now a central drag on growth, have already reduced 2025 GDP by an estimated 0.4 percentage points and are projected to further erode growth in the second half of 2025 and early 2026 The Conference Board Leading Economic Index® (LEI) for the US^[1]. This policy-driven slowdown is compounding existing challenges, including a softening labor market. U.S. average weekly initial unemployment claims fell to 231,000 in the week ending September 13, 2025, but the 4-week moving average remains elevated at 240,000, reflecting a labor market that is losing steam US weekly jobless claims fall to 231,000 - The Economic Times^[4].

Asset Allocation Revisions: A Defensive Shift

Investors must now grapple with the implications of this weakening momentum. Historically, a declining LEI and a services sector grappling with inflationary pressures have signaled a shift toward defensive assets. Here's how to adjust portfolios:

1. Underweight Cyclical Sectors: Tariff-sensitive industries, such as manufacturing and export-oriented equities, face prolonged headwinds. The ISM Manufacturing New Orders Index's volatility highlights fragile demand, while the Services PMI's employment contraction suggests reduced hiring in labor-intensive sectors TD Economics - U.S. ISM Manufacturing Index^[3].
2. Overweight Defensive Equities: Utilities, healthcare, and consumer staples—sectors less exposed to trade policy—may outperform as growth slows. These sectors have historically provided stability during periods of economic uncertainty.
3. Rebalance Fixed Income: With inflationary pressures persisting (evidenced by the Services PMI's 69.2% Prices Index ISM Services PMI: Strongest Growth in Six Months^[2]), long-duration bonds remain vulnerable. Instead, consider short-duration, inflation-linked Treasuries or high-quality corporate bonds to mitigate rate risk.
4. Hedge Against Volatility: A declining LEI and a diffusion index below 50 warrant increased allocations to gold, cash, or volatility-linked derivatives. The 2.8% six-month drop in the LEI The Conference Board Leading Economic Index® (LEI) for the US^[1] suggests a higher probability of policy interventions, which could drive market swings.

Conclusion

The U.S. economy is navigating a complex crosscurrent of tariff-driven drag, inflationary pressures, and a softening labor market. While a full recession remains unforecasted, the data compels a cautious approach. Investors should prioritize liquidity, defensive equities, and inflation-protected assets to weather the uncertainty. As the Conference Board notes, growth is expected to slow to 1.6% in 2025—a stark contrast to 2024's 2.8%—and the second half of the year will be critical in determining whether this slowdown stabilizes or accelerates The Conference Board Leading Economic Index® (LEI) for the US^[1].