Silver lining

Bottom line

As the federal government continues to play catch up from its record six-week shutdown, the Labor Department released a combined October and November jobs report this week. Taken together, they were a mixed bag. The unemployment rate (U-3) in November rose to a four-year high of 4.6%, up steadily from 4.0% in January 2025. But average hourly earnings (as a proxy for wage inflation) grew at a slower-than-expected pace of 3.5% year-over-year (y/y) in November, the lowest since May 2021 and down from 4.2% in November 2024.

Nonfarm payrolls in November rose by a stronger-than-expected 64,000 jobs (consensus at 50,000), which was much improved from October’s larger-than-expected loss of 105,000 jobs (consensus loss of 25,000 jobs expected), the biggest decline since the Covid pandemic in 2020. Private payrolls, in contrast, added 69,000 jobs in November (consensus at 50,000), up modestly from a gain of 52,000 in October.

Embedded in the October nonfarm payroll loss (versus a gain in private payrolls) was a decline of 162,000 federal government workers. According to the Office of Personnel Management, 144,000 federal employees accepted the Trump administration’s deferred resignation offers during the DOGE purge earlier this year. The layoffs became effective at the end of the federal government’s fiscal year on September 30. According to the Labor Dept., federal government employment is down by 270,000 workers overall since January, its lowest level in more than a decade.

Federal Reserve’s Phillips Curve trade-off Over the past seven months, nonfarm payroll gains have increased by an average of only 17,000 jobs per month — including jobs losses in June, August and October. That is the weakest pace since the depths of the Covid pandemic. That compares quite poorly with average monthly payroll gains of 123,000 over the first four months of 2025 and 168,000 during 2024. Private payrolls have added an average of 48,000 jobs over the past seven months, also weak compared with 108,000 jobs from January through April 2025 and an average of 130,000 over the course of 2024. 

November’s low wage inflation consistent with other metrics: 

• Core CPI retail inflation spiked to a 40-year high of 6.6% y/y in September 2022 and declined to a more than four-year low of 2.6% y/y in November 2025. 
• Employment Cost Index (ECI) eased to an increase of 0.8% quarter-over-quarter (q/q) in the third quarter of 2025, down from 0.9% q/q increases in the prior three quarters.
• Core PPI wholesale inflation spiked to a 40-year high of 9.7% y/y in March 2022 but declined to a 17-month low of 2.6% y/y in September 2025.
• Core PCE inflation peaked at a 39-year high of 5.6% y/y in September 2022 and declined to a four-year low of 2.6% in April 2025. Increased to 2.9% in July and August, likely related to a one-time adjustment from tariffs, but it slipped to 2.8% y/y in September. 

The Fed will likely direct a jaundiced eye at this week’s labor market and inflation data, as the government shutdown may have distorted recent collection and calculation efforts. That could prompt the Fed to pause at its next policy-setting meeting on January 28 to allow the economy to digest its three recent cuts. 

But by its next meeting on March 18, the federal government should have caught up with its data backlog – assuming, of course, that Congress doesn’t shut the government again on January 30. With potentially weak nonfarm payroll reports in hand from January and February and with inflationary pressures continuing to moderate, we expect a March rate cut. We then expect a transition to more dovish leadership at the Fed, when Chair Jerome Powell’s term expires in May 2026, perhaps resulting in two more cuts later next year. So, all in, we are still expecting a total of three quarter-point cuts in 2026, which would take the terminal value of the fed funds rate down to 3.0%.

Other key labor market indicators mixed:

• Initial weekly jobless claims improve modestly This high-frequency leading employment indicator declined to 224,000 for the week ended December 13, the survey week for the December payroll report. 
• ADP private payrolls decline November posted a weaker-than-expected loss of 32,000 jobs (consensus at a gain of 10,000), versus a gain of 47,000 jobs in October and losses of 29,000 in September and 3,000 in August. Workers who changed jobs last month saw their wages rise by 6.3% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest boost of 4.4% y/y, well below the peak of 7.8% in September 2022. 
• Challenger, Gray & Christmas layoffs soar Companies announced job cuts of more than 71,000 in November and 153,000 in October 2025, marking the worst year for layoffs at more than 1.1 million to date since the Global Financial Crisis. Seasonal hiring plans for Christmas are the lowest since Challenger started tracking them in 2012. 

Unemployment, labor impairment & participation rates all rise The government did not collect data on household employment due to the shutdown. But the size of the civilian labor force rose by 323,000 people from September through November, as more people entered the labor force looking for work, though only 96,000 of them found jobs, leaving 228,000 more people unemployed in November. 

As a result, U-3 rose for the fourth consecutive month to a four-year high of 4.6% in November, well above April 2023’s 53-year low of 3.4%. The Fed expects U-3 to reach 4.5% by year-end. The labor impairment rate (U-6) soared to a four-year high of 8.7% in November (up from 7.5% in January 2025), well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate rose for the third consecutive month to a six-month high of 62.5% in November, up from a cycle low of 61.4% in September 2020. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020. 

Wage inflation falls but hours worked rise Average hourly earnings rose by a much weaker-than-expected 0.1% m/m in November, down from a 0.4% m/m gain in October. Wage growth declined to a 3.5% y/y pace in November, its lowest reading since May 2021. The Fed is targeting a 3% increase. Meanwhile, average weekly hours worked ticked up to 34.3 in November. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. Employers tend to reduce workers’ hours before they cut staff.

K-shaped labor gap shrinks The unemployment rate of highly educated workers ticked up to 2.9% in November, up from September 2022’s cycle low of 1.8%. But that of less-educated workers was unchanged at 6.8% in November, well above its 31-year low of 4.4% in November 2022.

Sector details also mixed:

• Temporary help (an important leading employment indicator) lost jobs (5,000) in November for the seventh consecutive month, for the tenth time in 11 months, and for the 40th month of the past 43. 
• Manufacturing lost jobs (5,000) for the seventh consecutive month. 
• Construction added jobs (28,000) for the second time in the past three months. 
• Retail added jobs (6,000) for the fourth time in the past five months, as Back-to-School spending was strong, and Christmas got off to a good start.
• Leisure & hospitality lost jobs (12,000) for the first time in five months.

Read more about our views and positioning at Capital Markets

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