Softer-than-expected data continues to weigh on the August economic profile for the US. Retail sales slumped last month as did industrial output; translating the numbers into year-over-year changes reveals a downside bias. Initial jobless claims remain a bright spot, although the August payrolls report that was published earlier in the month posted a sharp deceleration in growth. Although the macro trend for the US is still on track to remain positive, recent numbers raise the possibility that growth will remain sluggish. As a result, the Federal Reserve is unlikely to raise interest rates at next week’s monetary policy meeting.

By some accounts, the 0.3% slide in retail sales last month is perplexing. “The underlying fundamentals for the consumer remain quite strong,” says Stephen Stanley, chief economist at Amherst Pierpont. “That makes August’s clunker of a report a little hard to explain.”

Maybe so, but retail spending in year-over-year terms continues to drift lower. The 1.9% increase last month vs. the year-earlier level is close to the slowest annual growth rate in seven years (red line in chart below).

Meanwhile, industrial production’s contraction shows no signs of ending any time soon. Output fell last month for the first time since May, pushing the year-over-year change deeper into the red (blue line in chart above). Industrial activity’s annual pace has been negative for 11 straight months, dipping 1.1% in August vs. the year-earlier level.

The weekly numbers on jobless claims, by contrast, rose less than forecast and continue to print at levels that are near a 43-year low. Looking at the data in year-over-year terms (via inverted monthly averages) still points to healthy growth for the labor market. But as we learned earlier a few weeks ago, there’s still a fair amount of uncertainty for the labor market after learning that job growth in August slowed after perking up sharply in the previous two months.

No surprise, then, that the Atlanta Fed yesterday trimmed its third-quarter GDP estimate to a 3.0% growth rate (seasonally adjusted annual rate). That’s still a healthy gain vs. the tepid 1.1% advance in Q2. But in the wake of recent numbers, it’s debatable if the upbeat projection will hold up by the time the Bureau of Economic Analysis publishes its preliminary Q3 GDP estimate on Oct. 29.

As for next week’s FOMC meeting, the crowd continues to downgrade the prospects for a rate hike. Fed fund futures are now pricing in a slim 12% chance that the Fed will announce a new round of tightening in its policy statement that’s due on Sep 21, based on CME data as of last night.

Note, however, that key Treasury yield spreads continued to rise through yesterday. Weaker growth and higher spreads is surprising. Indeed, history suggests that spreads tend to narrow when the economic trend eases. What’s going on? One theory that’s making the rounds: The bond ghouls are again becoming anxious about future inflation, and so the softer macro trend is on the back burner for the moment. Perhaps, but there’s a glitch in that theory: most of the available data provides little if any support for expecting stronger pricing pressures any time soon.

Considering the recent economic news, in other words, suggests that a steepening yield curve looks misplaced in the current climate. Despite the recent uptick, “yield curves remain remarkably flat,” writes Menzie Chinn, an economics professor at the University of Wisconsin. “I’d worry more about a slowdown than an imminent inflationary surge.

The Treasury market, however, seems to have a different perspective. But the steepening curve of late may reflect confusion and/or doubt about the path ahead for central bank policies generally. “Are central banks reaching the limit of what they can do?” asks Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “What’s the next stage? That’s the big picture that is being discussed by markets now.” The debate, he advises, “could push longer-dated bond yields further up.”