Tug of war

Bottom line

With the longest federal government shutdown in history now in its rearview mirror, the Labor Department is, as it were, back to work. Yesterday it released the delayed September jobs report, whose data had been collected before the closure. The Federal Reserve was anxiously awaiting the data dump, hoping for a clear signal ahead of its upcoming policy-setting meeting on December 10. But central bankers were likely disappointed, as the September jobs report was as clear as mud, only adding to the overall state of confusion.

Equity markets internalized the muddle, fueling a significant intraday decline of more than 3% yesterday. That extended the S&P 500’s recent correction from its record high on October 29 — the date of the Fed’s quarter-point interest rate cut — to nearly 6%.

Something for everyone Fed hawks can point to stronger-than-expected gains in both nonfarm and private payrolls of 119,000 and 97,000 jobs, respectively, as well as solid household gains of 251,000, as to why there’s no need to cut rates.

Fed doves can note that job totals were collectively revised down by 33,000 and 41,000, respectively, during July and August for nonfarm and private payrolls. The unemployment rate rose to a four-year high of 4.4% in September, while average hourly earnings inched up by a softer-than-expected 0.2% month-over-month (m/m). Also, the manufacturing and temporary-help sectors have both lost jobs in each of the past five months. Viewing this as a sign the labor market is deteriorating and wage inflation is slowing, they could assert that another rate cut is a slam dunk.

We fall on the side of the doves, anticipating a quarter-point cut on December 10, followed by three more quarter-point cuts over the course of 2026. That would lower the upper band of the fed funds rate to a terminal value of 3.0%. 

Dual mandate tug of war If we look at the bigger picture, the Fed’s prospective policy path comes into clearer focus. Over the past five months, nonfarm payroll gains have deteriorated to an average of only 39,000 jobs per month — including job losses in June and August. That is the weakest pace of job creation since the depths of the Covid pandemic. That compares with average monthly payroll gains of 123,000 over the first four months of 2025 and 168,000 during 2024.

At the same time, inflation has slowed considerably. Nominal CPI inflation spiked from 1.4% year-over-year (y/y) in January 2021 to a 41-year high of 9.1% in June 2022 and has since plunged to a four-year low of 2.3% in April 2025. But over the past five months, retail inflation rose to 3.0% in September 2025, likely due to a one-time adjustment from the implementation of President Trump’s tariff policies. Retail CPI has averaged 2.8% y/y over the past 40 years. So, it appears that the risk to the labor market outweighs inflation concerns.

Economic impact from the government shutdown The US economy was raking pre-shutdown. From 3.8% GDP growth in the second quarter of 2025, the Atlanta Fed’s GDPNowcast is projecting 4.2% in the third quarter. We would know more had the figure not been another casualty of the government shutdown. Speaking of that, the Congressional Budget Office (CBO) estimates that the record 43-day shutdown may have cut as much as 1.5% from fourth quarter growth. We’ll regain some of this in next year’s first quarter, of course. But an estimated 670,000 federal workers were furloughed during the shutdown, another 730,000 essential federal employees worked without pay, and some 60,000 workers outside of the federal government lost their jobs due to the economic impact from the shutdown. So, lower interest rates from the Fed could help to cushion some of this negativity, particularly during the holidays.

K-shaped labor gap widens Unemployment for highly educated workers rose a tick to 2.8% in September, up from the same month in 2022, which was a cycle low of 1.8%. But the unemployment rate for less-educated workers rose to 6.8% in September, well above its 31-year low of 4.4% in November 2022.

Immigrant deportations are likely contributing to the labor-market imbalance The participation rate for foreign-born workers declined from 67.2% in September 2024 to 66.3% in September 2025, while the number of employed foreign-born workers declined by 2.1% over the past year. The participation rate for immigrant labor had been rising strongly over the past few years. But the participation rate for native-born workers held steady at 61.6% in September 2025 from a year ago, while the number of employed native-born workers increased by 1.9%.

Other key labor-market indicators are mixed:

• Initial weekly jobless claims decline This high-frequency leading employment indicator slipped to a two-month low of 220,000 for the week ended November 14, which is the survey week for the November payroll report. But the Labor Department won’t report November payrolls until December 16, as it continues to play catch up from the shutdown. The October jobs report, which was due on November 7, won’t be published, although some of that data will be incorporated in the December 16 report. So, the Fed won’t have access to any of this new employment data when it meets again on December 10.
• ADP private payrolls rise in October The ADP report posted a stronger-than-expected gain of 42,000 jobs (consensus at 30,000), up from losses of 29,000 in September and 3,000 in August, but down by more than half from a gain of 104,000 jobs in July. Workers who changed jobs last month saw their wages rise by 6.7% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest boost of 4.5% y/y, well below the peak of 7.8% in September 2022. 
• Challenger, Gray & Christmas layoffs soar Companies announced job cuts of more than 153,000 in October 2025, which represents a 183% m/m increase from September 2025, and a 175% year-over-year (y/y) increase from October 2024. That’s the highest level for any October since the technology bubble burst in 2003. This also marks the worst year for layoffs at 1.1 million to date since the Global Financial Crisis. Warehousing (31% of the total layoffs of 153,000) and technology (21%) account for about half the total layoffs in October. Companies are motivated to reduce their staffing levels after their post-pandemic hiring boom, due to cost cutting, the impact from anticipated AI adoption, and the expected economic slowdown from the federal government shutdown. Seasonal hiring plans through October are the lowest since Challenger started tracking them in 2012.

Unemployment and participation rates rise, labor impairment falls Household employment (an important leading employment indicator) rose by 251,000 jobs in September, down slightly from a gain of 288,000 jobs in August, but up sharply from a decline of 260,000 jobs in July. The unemployment rate (U-3) rose for the third consecutive month to a four-year high of 4.4% in September (due to an increase in the labor force of 470,000 people), well above April 2023’s 53-year low of 3.4%. The Fed expects U-3 to rise to 4.5% by year end. The labor impairment rate (U-6) eased to 8.0% in September, down from a four-year high of 8.1% in August, but well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate rose for the second consecutive month to 62.4% in September. 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 and hours worked steady Average hourly earnings rose by a softer-than-expected 0.2% m/m in September, down from a 0.4% m/m gain in August. Wage growth was unchanged at a 3.8% y/y pace in September. The Fed is targeting a 3% increase. Meanwhile, average weekly hours worked were unchanged at 34.2 in September. 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 a worker’s hours before they cut staff.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 16,000 jobs in September, making five  consecutive months of losses and eight of the last nine months. This sector has given up jobs in 38 of the past 41 months. 
• Manufacturing lost 6,000 jobs in September, marking the fifth consecutive month of losses. 
• Construction added 19,000 jobs in September, reversing three consecutive months of job losses.
• Retail added 14,000 jobs in September, 3,000 in August and 6,000 in July, as Back-to-School spending was strong. 
• Leisure & Hospitality rebounded with the strongest hiring in six months, adding 47,000 workers in September, up from 32,000 in August and 9,000 in July. 

Read more about our views and positioning at Capital Markets

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