“Workin’ for a livin’
livin’ and a workin’
I’m taking what they’re giving ’cause I’m workin’ for a living“
(From “Workin’ for a Living,” by Huey Lewis and the News, 1982)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
All eyes are on the Federal Bank’s December FOMC meeting on December 9-10. Expectations regarding a rate cut have been extremely volatile because of the lack of economic data during the government shutdown.
The most recent official data we have is only through September. It has already been announced that there will be no official October data, and the November data will come out after the Fed meeting.
So, at best, the Fed is working (at least officially) with stale data, which is one reason there is so much uncertainty regarding its decision.
The Economy and Inflation
One thing most analysts agree with is that the US economy continues to chug along. We don’t have official government data, but the Atlanta Fed “GDPNow” forecast is for Q3 GDP growth of just shy of 4%.
Source: Atlanta Fed “GDPNow” forecast, as of December 1, 2025. This is a forecast and will change as additional data come in.
As a reminder, the Fed has a dual mandate – optimizing employment and controlling inflation. What makes the December meeting interesting is that, currently, those two metrics may be moving in opposite directions – inflation may be rising while the labor market may be cooling.
Recent dovish comments by several Regional Federal Reserve Presidents, along with weakish employment numbers, resulted in the market increasing its assumed probability of a rate cut to roughly 70% –but nothing is set in stone.
Source: The Atlanta Fed Market Probability Tracker, as of November 26, 2025.
We know that inflation is trending in the wrong direction, away from the Fed’s stated target rate of 2% annualized (at least as measured by the primary inflation metrics).
Source: St. Louis Fed (FRED), 5-year data through September 2025.
But there are some interesting – and offsetting – nuances worth illustrating.
First is the convergence of consumer inflation, as measured by the CPI, and producers’ input inflation, as measured by the Producer Price Index (PPI).
Source: St. Louis Fed (FRED), 3-year data through September 2025.
Producers stockpiled inventory early in the year in anticipation of the Liberation Day tariff announcements. Until recently, those producers have been working through those stockpiled inventories and choosing to “eat” the increased input costs and realize lower profit margins versus passing on those higher costs to consumers.
It begs the question of how much longer that can last before producers begin to increase prices to consumers, which would put upward pressure on the CPI.
On the other hand, there is an interesting aspect of the CPI number: roughly one-third of the total metric relates to “shelter” costs. But shelter costs report with a six- to nine-month lag. Take a look at how that is currently playing out.
Source: Bureau of Labor Statistics, as of September 2025.
We see that shelter costs are falling (but with a lag to the headline CPI number). As those two numbers converge, we would expect that to put downward pressure on the CPI.
Which is one reason the Fed is in a bit of a pickle, and why there is public disagreement between varying Fed Governors and Presidents as to what the Fed should do at the December meeting.
Which Leaves Us with The Labor Market
There is little doubt that, if the Fed does cut rates in December, it will cite a cooling labor market as the catalyst.
So, let’s examine some of the metrics they may be analyzing, remembering that the most current official data we have is through September.
First, the headline unemployment metrics.
Source: The St. Louis Fed (FRED), 5-year data through September 2025.
We see that the headline unemployment is trending upward but remains below 5% — historically, considered a “full employment” level.
When viewed through different lenses, however, we see the employment trend is definitely moving in the wrong direction.
Source for both charts: The St. Louis Fed (FRED), 3-year data through September 2025.
Job Openings, Hires, and Quits
Now let’s look at some of the “numbers behind the numbers,” specifically the job openings, hires, and quits rates. We like to focus on the quits rate, as it is an indicator of workers’ confidence in finding a new job if they quit the ones they have.
Source: The St. Louis Fed (FRED), through August 2025.
What we see is a general decline in job openings, hires, and quits. This suggests the job market is softening but does not seem to be in dire straits just yet (but remember these levels are only through August).
Jobless Claims
Next, let’s look at jobless claims, both initial and continuing claims. These numbers come out weekly (and have now resumed following the government shutdown) and so are the most contemporaneous of the labor metrics. In other words, if there is a softening in the labor market, these metrics are likely to identify it first.
The weekly numbers can be quite volatile, so we focus on the 4-week moving averages to “smooth out” that weekly volatility.
Initial claims have been remarkably stable for most of the past three years, at around plus or minus 200,000 per week. We do see an upward trend in continuing claims. The implication is that employed workers are not losing their jobs, but people out of work are finding it more difficult to find new ones.
Source: St. Louis Fed (FRED), data through November 8, 2025.
Participation Rates
Next, let’s look at the actual participation in the work force – how many people of “working age” are actually working (the Labor Force Participation Rate, or LPR) and what percentage of the overall population is in the workplace (the Employment to Population ratio, or ETP).
Women entered into the workplace in force in the 1970s and 1980s (not that they weren’t working hard domestically before then, but as measured by the Labor Participation rate). That peak has declined and held steady for most of the past ten years. We see a similar story in the Employment to Population ratio – not out of line with historical levels and stable for most of the past ten years.
When you factor in the reality that “baby boomers” (workers born between 1945-1960) are leaving the workforce at an increasing rate, and ignore the Covid-induced disruption, the stability of both metrics speaks to an ongoing resiliency of the labor market.
Source, St. Louis Fed (FRED), 10-year data as of September 2025.
Finally, let’s look at wages and productivity.
Productivity
As a simplistic but directionally accurate comment, an economy can grow by (a) adding more workers and/or (b) increasing the productivity of existing workers.
In other words, strictly from an economic growth perspective, a decline in the employment level can be mitigated if the productivity rate of the remaining workers increases.
We mention this because of the ongoing and accelerating evolution of artificial intelligence (AI). We are still in the initial stages of the AI revolution, but few people doubt that AI and robotics will eventually replace the need for the same number of workers doing repetitive jobs.
This will be a monumental social challenge, similar to the Industrial Revolution of the late 1700s to late 1800s and the “tech revolution” of the early 2000s. Workers will be displaced, and it will cause social friction as workers are forced to evolve toward jobs and careers that cater to the new economic reality.
But, in the meantime, here is what we see. Ignoring the Covid-driven disruption, both the number of workers and their corresponding level of productivity have been fairly stable for the past ten years, which to us suggests two things: (1) the AI-driven productivity boom has not yet been fully realized and, therefore, (2) any significant decline in the employment level will have a correspondingly significant impact on economic growth.
Source: St. Louis Fed (FRED), 10-year data through Q1 2025.
Wages
For wages, we will compare wage growth to the headline inflation rate. Wage growth dramatically lower than the inflation rate can drive “wage inflation” as workers demand higher pay to keep up with the price of goods and services.
The other side of that coin is that, even if wages are going up, workers may feel worse off if their pay doesn’t “stretch” as far as it used to.
On this point, it is important to remember that inflation spiked at roughly 9% just after Covid, as the Fed kept rates low and massive amounts of fiscal stimulus were injected into the economy.
Why that matters is because now, even with the inflation rate coming down, those higher prices are “baked in” to current prices.
Put differently, even if the Fed achieves its target 2% annualized inflation rate, that is coming on top of the 9% that we saw a few years ago (and the market will never go back to pre-inflationary prices unless we enter a serious recession / depression).
So, wages matter, even if they have somewhat of a “derivative” effect on the status of the labor market. Here we use the Personal Consumption Expenditure (PCE) index as the measure of inflation, which is the metric the Fed prefers because it accounts for changes in consumer behavior as prices change.
Source: The St. Louis Fed (FRED), 5-year data through September 2025.
There are two things to notice: (1) inflation rose significantly faster than wages from 2021 until 2023, at which point wages rose faster than inflation, but (2) many workers didn’t “feel” better off because they fell so far behind during those high inflation years.
The fact that wages are now growing at a higher absolute level versus inflation is a positive for workers, but it doesn’t feel like it to many because they still haven’t caught up to those “baked in” higher prices.
As the economy slows down, which it will at some point, it will be difficult for workers to demand higher wages. This will be especially true if people begin losing their jobs.
Summary and Interpretation
One reason (among several) we witnessed a decline in the equity markets over the past few weeks, including the mega-cap tech stocks, is the uncertainty over the Fed’s rate decision at its December meeting.
The market certainly wants a rate cut and will probably react negatively if it doesn’t get one.
But this is probably as divisive a Fed as we’ve seen in a long time – and many of the Governors and Presidents have been very public about their respective positions.
[We’re not sure that is a positive development, but that is a conversation for another day.]
This disagreement stems from the divergence in trends between inflation and the labor market. Inflation is trending upward while employment is trending downward.
So-called Fed “hawks” will focus on rising inflation as a reason to not cut rates. Likewise, so-called Fed “doves” will focus on a cooling labor market as a reason to cut rates.
The November Fed meeting illustrates this point. While the majority of the Fed members voted for a 25-bps cut, one member voted for no cut, while another voted for a 50-bps cut. That divergence of views simply doesn’t happen very often within the consensus-oriented Fed.
Barring any dramatic new information prior to December 9, we suspect the Fed will vote to cut – but it is not a sure thing.
We are of the opinion that there is not an overly persuasive argument in favor of cutting – we guess that makes us more “hawk-leaning.” The labor market is cooling, but so far does not seem to be showing signs of distress.
But we believe the Fed will cut anyway and will also signal a more dovish stance as we head through 2026 (that is, we expect to see more rate cuts next year).
So, grab a bag of popcorn and settle in for what should be an interesting and enlightening two days in early December (especially the responses from the vocal critics whichever way the decision turns out).
In any event, from an investment perspective, we repeat (yet again) our fundamental investment philosophy:
We continue to recommend diversification at both the asset class and risk factor levels, maintaining portfolio discipline, and maintaining a longer-term time horizon.
Focus on the signals, not the noise.
As always, we welcome your questions and feedback.