November CPI Report Raises Doubts About US Inflation Data

In a report fouled by the record-long government shutdown, inflation in several categories that had long been stubborn seemed to nearly evaporate. Chief among those were shelter costs, which make up about a third of the consumer price index, but other categories like airfares and apparel notably declined.

Because of the shutdown, the Bureau of Labor Statistics couldn’t collect prices throughout October and started sampling later than usual in November. The so-called core CPI, which excludes food and energy, increased 2.6% in November from a year ago — the slowest pace since 2021 and below all estimates in a Bloomberg survey of economists.

Several forecasters pointed to the absence of that October data — which resulted in pages of blank spaces in the widely watched report — as effectively the same as assuming no price growth for the month. That culminated in sizable downward pressure on the November inflation figures, they said. Some noted the shortened collection period could have also skewed the data.

Stacey Standish, a spokesperson for BLS, said the agency used a process called carry-forward imputation for key housing price metrics. This method “imputes the price by using data from the last collected period, effectively proceeding as if the price had not changed,” she said. “Rents for October 2025 were carried forward from April 2025, yielding unchanged index values for rent and owners’ equivalent rent for October.” (…)

The shutdown limited the BLS’s ability to calculate standard month-over-month price index values, so it mostly observed changes from September to November instead. In FAQs and other supporting documents published the day before the report, the agency forewarned that some of the data may not be totally trustworthy.

“If bimonthly CPI data are volatile, then less confidence should be placed in estimates for the missing months,” BLS said Wednesday in a document explaining how to approximate missing data points. (…)

The month-over-month changes for key housing categories will largely be sorted with the release of the December CPI — though they may look “high,” Sharif said. But the annual changes will likely be impacted for longer.

That’s because BLS samples several panels of households about their rents on a rolling six-month basis, so some of the errant October values may not fall out of the index until April.

Despite the idiosyncrasies, several economists maintained that inflation is cooling, just perhaps not as much as Thursday’s report would suggest.

“Through the noise, we believe inflation is slowing on trend, even if today’s reading overstates the magnitude of the slowdown,” Wells Fargo & Co. economists said in a note.

Goldman Sachs explains why CPI data will be almost useless until April 2026.:

Rent and OER are calculated based on a six-month rotating panel in the CPI, so the month-over-month increase in November is roughly the 6-month average monthly increase since May. This monthly rate is applied to the October index level—which the BLS assumed was flat relative to September—so the shelter components only increased by one month’s worth of rent inflation between September in November.

The Bureau of Labor Statistics (BLS) has not said how it will address these distortions, but today’s reading could be partially offset by a rebound in the shelter components in the April CPI, six months after October.

Core goods inflation was soft at 0.03% on average between October and November.

We suspect that some of the weakness could reflect later-than-usual price collection, as the BLS only collected prices in the second half of November when holiday promotions typically lead to lower prices, which is likely to be offset by higher measured inflation in December.

Apparel prices, household appliances prices, and sporting goods prices all declined 0.4% on average in October and November, toy prices declined 0.5%, hardware equipment prices declined 0.1%, and miscellaneous personal goods prices declined 1.2%, the largest two-month average decline since February 2021.

On the services side, the volatile airfares component declined 3.4%, weighing on the core by 4bp, and the health insurance component—which featured a semiannual update of the underlying source data this month—declined 1.4% (NSA), implying a drag of about 1.3bp on monthly core CPI until the next source data update in April.

Recreation services prices declined 0.3%, partially reflecting an unusual 1% decline in club membership fees—the second-lowest two-month-average reading in the series’ history.

Education and communication services prices increased 0.4%, and other personal services prices also increased 0.4%.

Headline CPI rose 0.10% on a two-month-average basis, reflecting a 0.5% increase in energy prices but flat food prices.

The distortions to shelter prices in today’s CPI will have a somewhat smaller effect on core PCE because shelter has a lower weight in CPI than PCE, but the drags on some goods prices in today’s report will receive more weight in core PCE.

Wolf Richter:

Lots of things depend on CPI, including the calculation of the “inflation protection” in Treasury Inflation Protected Securities (TIPS), I-series savings bonds the government sells to retail investors, Social Security COLAs, and other inflation adjustments paid to investors and beneficiaries, and they will all be underpaid for inflation.

This data here also impacts broader economic data that is adjusted to inflation, including “real” consumer spending and “real” GDP because the BEA, which produces those overall economic indices, uses some of this CPI data, including OER, for its calculation of the PCE price index and the GDP deflator, among others.

BLS is now causing serious issues with all of them, with investors and beneficiaries getting short-changed on their inflation protection, and with inflation-adjusted economic data getting inflated, which would, of course, suit the administration’s narrative.

CPI-Rent for November per the BLS is up 3.0% YoY, down from 3.4% in September. Meanwhile, the Zillow rent index, actually declining MoM since September, is up 2.2% YoY in November from 2.3% in September. In truth, the BLS “data” is not that bad, actually overstating rent inflation a little, but on the right trend vs real world data.

Yes, this CPI release is not very useful but that’s not a big deal.

The World Is Awash With Oil and Prices Are Poised to Keep Falling

(…) Old and new producers alike are ramping up output as sanctioned barrels from Russia search for buyers, putting a record 1.3 billion barrels of crude on the world’s oceans. Benchmark oil prices are heading for their biggest annual loss since the pandemic, while US gasoline at the pump is less than $3 a gallon for the first time since 2021. (…)

Virtually all of the world’s biggest traders see the oil market in a state of oversupply early next year — the only question is by how much. The International Energy Agency estimates that output could exceed consumption by around 3.8 million barrels a day in 2026. Many traders predict smaller numbers than that, but storage levels are still expected to grow.

When that happens, oil prices usually fall. Global benchmark Brent crude is down 20% this year to trade near $60 a barrel. Trafigura, one of the world’s top commodities traders, says oil could be in the $50s through the middle of the year before recovering into the end of 2026.

“It’s a market where everybody agrees what’s going on,” Ben Luckock, global head of oil at the firm, said in an interview. “Prices should be lower, but they can’t be because there’s a war going on in Ukraine still.”

The oil market remains sensitive to geopolitical conflicts that could send futures soaring on any given day. A Ukraine-Russia ceasefire agreement, which could add even more Russian barrels to the market if sanctions are eased, remains elusive. Tensions between the US and Venezuela have escalated, with Trump ordering a blockade of sanctioned oil tankers to and from the South American country. A rapprochement or regime change could initially send prices up but ultimately bring more of that supply to market.

Any sustained price drop next year will be because of the scale of the supply additions that are emerging — fast outpacing uneven consumption growth. Brent crude hasn’t averaged below $60 a barrel for a full year since 2020, and before that the last time it did so was in 2017. (…)

Rising exports from OPEC and non-OPEC producers mean more oil is in transit or waiting to be sold as producers seek out willing buyers for their cargoes, according to Muyu Xu, senior crude oil analyst at Kpler.

“The growing oil-on-water levels point to a supply glut,” she said. (…)

This is a big deal, economically, financially and politically.

CPI-Services was up 3.0% YoY in November, down from +3.6% on average since March. Lower oil/gasoline prices will put downward pressures in services inflation while freeing up much discretionary income this winter, acting like a big tax cut for most consumers.

• Jobs Could Soon Replace Prices as Focus of Anxiety Inflation has been top-of-mind for years. That could change.

(…) Unemployment’s rise has been gradual and the level is still moderate, yet fragility is amply evident beneath the surface. The number of people working part time who wanted to work more leapt to 5.5 million in November, and is now up 23% from a year earlier. Those unemployed for more than half a year rose to 1.9 million from 1.8 million in September and 1.65 million a year earlier. It may not be a recession, but for anyone trying to find a job, it is starting to feel recession-like.

Meanwhile, average hourly earnings in November were up just 3.5% from a year earlier, the lowest since 2019 if pandemic-distorted figures are excluded. Other data do show firmer growth. But with employers reluctant to hire and unemployment growing, the pressure on wages is likely downward.

The question is why. Economic growth has topped 3% in the second and third quarter, according to the latest estimates. Corporate profits are strong, and the stock market is near record highs.

The labor market is usually closely linked to the pulse of the overall economy. Yet in its latest survey, the Business Roundtable finds that more chief executives plan to cut than add jobs for the third straight quarter, the lowest three-quarter reading since the 2007-09 recession.

One reason for the disconnect between the job market and the broader economy is tariffs. Economists expected them to show up as rising prices for imports. In real life, though, inputs don’t always map neatly to outputs. To cope with higher costs, whether for tariffs, energy, taxes, or health insurance, a business owner looks at all options, which may mean trimming head count instead of raising prices. Maybe it isn’t a coincidence that payroll growth stepped down sharply in the spring, just as Trump’s biggest tariff increases took effect, while the effect on inflation has been muted.

If so, relief is on the way. Tariff rates have stabilized and may actually drop if the Supreme Court rules against some in the coming weeks.

Yet even if the tariff effect fades, other headwinds remain, mostly artificial intelligence. “In three years this has gone from being a novelty party gag to being embedded in all your hiring plans and production,” Federal Reserve governor Chris Waller told executives at an event hosted by Yale University’s School of Management on Wednesday. “The speed at which jobs are going away is what’s frightening, and we are not able to see the jobs that are coming [although] they will come.”

Trump has locked arms with the AI industry. Politically, that could be a liability. Surveys by the Edelman Trust Institute find users in the U.S. are twice as likely to say they reject as embrace the growing use of AI. By a similar margin, they don’t believe business leaders are being fully honest about the impact on jobs.

The conventional wisdom in Washington is that costs will be the dominant issue heading into next fall’s midterm elections. The latest trends on AI and job security hint that the conventional wisdom may have to change.

China boosts AI chip output by upgrading older ASML machines Restricted chipmaking tools are being retrofitted to make advanced AI chips, exposing cracks in US-led export controls

According to people familiar with the matter, Chinese fabrication plants producing advanced smartphone and AI chips have bolstered the performance of advanced deep ultraviolet lithography (DUV) machines made by Netherlands-based ASML.

US and Dutch export controls prevent ASML from supplying its most advanced DUV machines to China, leaving many Chinese fabs to rely on older equipment — notably the Twinscan NXT:1980i system — to manufacture the seven-nanometre chips needed to develop AI systems.

According to those familiar with the techniques, Chinese fabs have obtained components on the secondary market. This includes an upgraded “stage”, a mechanical platform for the silicon wafer, as well as lenses and sensors that help ensure that chip layers are aligned with greater precision.

These improvements to ASML’s DUVs have enabled Chinese fabs to bolster their AI chip production. China’s chipmakers Semiconductor Manufacturing International Corporation (SMIC) and Huawei are among those known to be using older ASML machines to build seven-nanometre production lines — although it is unclear if they have secured further component upgrades.

The moves underscore how Chinese chipmakers are finding methods to overcome global export controls meant to stall the country’s technological rise. The US has sought to apply curbs to stop China accessing cutting-edge chips, while pressuring governments in the Netherlands, South Korea and Japan to also tighten their sales controls. (…)

Under this regulatory regime, ASML is allowed to provide engineering support for Chinese customers to service their existing equipment. But the Dutch company is restricted from servicing upgrades to the “overlay”, or positioning accuracy of the DUV machines, or from making changes that improve the “throughput” — or speed — of the machines beyond 1 per cent.

Multiple people familiar with the arrangements said local fabs sourced components overseas and ship them to China. They said that third-party companies provided on-site engineering to upgrade existing DUV machines. (…)

Export controls also prevent ASML from supplying China with even more advanced extreme ultraviolet (EUV) machines. That has led Chinese fabs to use techniques such as multiple DUV exposures — a process known as “multi-patterning” — to produce advanced chips.

But the method demands longer machine run-times, increasing production costs and reducing “yield” — the percentage of functional chips. Component upgrades had enabled the fabs to mitigate some of these constraints and raise output of AI and advanced smartphone chips, said those familiar with the matter.

Analyst group TechInsights said this month that SMIC continued to push the boundaries of this multi-patterning technique beyond the seven-nanometre process. It added that Huawei’s latest Kirin 9030 processor revealed China’s most advanced chip manufacturing process to date. “Chinese fabs have been able to achieve impressive feats without full access to the best equipment available to others like TSMC and Samsung,” said TechInsights chief strategy officer Dan Kim.

The US Bureau of Industry and Security had been probing what support ASML has been providing to Chinese customers and had been preparing to make the rules stricter to stop it providing some servicing support permitted under the current rules, said two people familiar with the agency’s thinking.

It is unclear if BIS will push ahead with rule changes after the Trump administration signalled a truce in its trade war with Beijing. ASML has lobbied against export controls on China, an important market and the world’s largest purchaser of wafer fabrication equipment in 2024. Former chief executive Peter Wennink argued such curbs provided no additional security benefit for the west, since China already had the equipment it needed to make chips for military purposes.

China’s newest production lines are running ASML’s newer 2050i and 2100i DUV tools, which incorporate an upgraded stage mechanism. The Dutch government revoked ASML’s export licence for both machines in September 2024, but only after numerous units had been shipped and installed.

ASML’s revenue from China has jumped as local chipmakers rushed to secure equipment before expected restrictions took effect. In 2023, the company booked €7.2bn in China sales, accounting for 26 per cent of global revenue. In 2024, that figure climbed to €10.2bn, or 36 per cent of total sales. It warned investors in October that sales to China would “decline significantly” next year.

  Reuters reveals that China is actually very close to making its own EUVs:

• How China built its ‘Manhattan Project’ to rival the West in AI chips

In a high-security Shenzhen laboratory, Chinese scientists have built what Washington has spent years trying to prevent: a prototype of a machine capable of producing the cutting-edge semiconductor chips that power artificial intelligence, smartphones and weapons central to Western military dominance, Reuters has learned.

Completed in early 2025 and now undergoing testing, the prototype fills nearly an entire factory floor. It was built by a team of former engineers from Dutch semiconductor giant ASML who reverse-engineered the company’s extreme ultraviolet lithography machines or EUVs, according to two people with knowledge of the project.

EUV machines sit at the heart of a technological Cold War. They use beams of extreme ultraviolet light to etch circuits thousands of times thinner than a human hair onto silicon wafers, currently a capability monopolized by the West. The smaller the circuits, the more powerful the chips.

China’s machine is operational and successfully generating extreme ultraviolet light, but has not yet produced working chips, the people said.

In April, ASML CEO Christophe Fouquet said that China would need “many, many years” to develop such technology. But the existence of this prototype, reported by Reuters for the first time, suggests China may be years closer to achieving semiconductor independence than analysts anticipated.

Nevertheless, China still faces major technical challenges, particularly in replicating the precision optical systems that Western suppliers produce.

The availability of parts from older ASML machines on secondary markets has allowed China to build a domestic prototype, with the government setting a goal of producing working chips on the prototype by 2028, according to the two people.

But those close to the project say a more realistic target is 2030, which is still years earlier than the decade that analysts believed it would take China to match the West on chips.

The breakthrough marks the culmination of a six-year government initiative to achieve semiconductor self-sufficiency, one of President Xi Jinping’s highest priorities. While China’s semiconductor goals have been public, the Shenzhen EUV project has been conducted in secret, according to the people. (…)

Chinese electronics giant Huawei plays a key role coordinating a web of companies and state research institutes across the country involving thousands of engineers, according to the two people and a third source.

The people described it as China’s version of the Manhattan Project, the U.S. wartime effort to develop the atomic bomb.

“The aim is for China to eventually be able to make advanced chips on machines that are entirely China-made,” one of the people said. “China wants the United States 100% kicked out of its supply chains.” (…)

Until now, only one company has mastered EUV technology: ASML, headquartered in Veldhoven, Netherlands. Its machines, which cost around $250 million, are indispensable for manufacturing the most advanced chips designed by companies like Nvidia and AMD—and produced by chipmakers such as TSMC, Intel, and Samsung. (…)

No EUV system has ever been sold to a customer in China, ASML told Reuters. (…)

One veteran Chinese engineer from ASML recruited to the project was surprised to find that his generous signing bonus came with an identification card issued under a false name, according to one of the people, who was familiar with his recruitment.

Once inside, he recognized other former ASML colleagues who were also working under aliases and was instructed to use their fake names at work to maintain secrecy, the person said. Another person independently confirmed that recruits were given fake IDs to conceal their identities from other workers inside the secure facility.

The guidance was clear, the two people said: Classified under national security, no one outside the compound could know what they were building—or that they were there at all.

The team includes recently retired, Chinese-born former ASML engineers and scientists—prime recruitment targets because they possess sensitive technical knowledge but face fewer professional constraints after leaving the company, the people said.

Two current ASML employees of Chinese nationality in the Netherlands told Reuters they have been approached by recruiters from Huawei since at least 2020.

European privacy laws limit ASML’s ability to track former employees. Though employees sign non-disclosure agreements, enforcing them across borders has proven difficult. (…)

The ASML veterans made the breakthrough in Shenzhen possible, the people said. Without their intimate knowledge of the technology, reverse-engineering the machines would have been nearly impossible. (…)

ASML’s most advanced EUV systems are roughly the size of a school bus, and weigh 180 tons. After failed attempts to replicate its size, the prototype inside the Shenzhen lab became many times larger to improve its power, according to the two people.

The Chinese prototype is crude compared to ASML’s machines but operational enough for testing, the people said.

China’s prototype lags behind ASML’s machines largely because researchers have struggled to obtain optical systems like those from Germany’s Carl Zeiss AG, one of ASML’s key suppliers, the two people said. (…)

The Changchun Institute of Optics, Fine Mechanics and Physics at the Chinese Academy of Sciences (CIOMP) achieved a breakthrough in integrating extreme-ultraviolet light into the prototype’s optical system, enabling it to become operational in early 2025, one of the people said, though the optics still require significant refinement. (…)

A team of around 100 recent university graduates is focused on reverse-engineering components from both EUV and DUV lithography machines, according to the people. (…)

While the EUV project is run by the Chinese government, Huawei is involved in every step of the supply chain from chip design and fabrication equipment to manufacturing and final integration into products like smartphones, according to four people familiar with Huawei’s operations.

CEO Ren Zhengfei briefs senior Chinese leaders on progress, according to one of the people. (…)

This is a big, big deal.

Here’s another big deal:

Inside Meta’s Pivot From Open Source to Money-Making AI Model

Meta Platforms Inc.’s Mark Zuckerberg, months into building one of the priciest teams in technology history, is getting personally involved in day-to-day work and pivoting the company’s focus to an artificial intelligence model customers pay to use.

One new model, codenamed Avocado, is expected to debut sometime next spring, and may be launched as a “closed” model — one that can be tightly controlled and that Meta can sell access to, according to people familiar with the matter, who declined to speak publicly about internal plans.

The move, which aligns with what rivals Google and OpenAI do with their models, would mark the biggest departure to date from the open-source strategy Meta has touted for years. Open-source models allow outside developers and researchers to review and build upon the code. Meta’s new Chief AI Officer Alexandr Wang is an advocate of closed models, according to the people.

Meta’s strategy shifted dramatically earlier this year after the company released Llama 4, an open-source model that disappointed Silicon Valley and Zuckerberg, Meta’s chief executive officer. He sidelined some of the people who worked on that project and personally recruited top AI researchers and leaders, in some cases offering them hundreds of millions of dollars in multiyear pay packages, and some, like Wang, who came in through a $14.3 billion investment deal. Now, Zuckerberg spends much of his time and energy working closely with those new hires, in a group called TBD Lab.

The TBD group is using several third-party models as part of the training process for Avocado, distilling from rival models including Google’s Gemma, OpenAI’s gpt-oss and Qwen, a model from the Chinese tech giant Alibaba Group Holding Ltd., the people said.

Training the new model on Chinese technology signals a shift in tone for Zuckerberg, who raised concerns on Joe Rogan’s podcast in January that Chinese models could be shaped by state censorship. Zuckerberg has since repeatedly advocated for US government support for American tech companies seeking to dominate the global AI race before China can, and said his open-source strategy was part of leading that mission. But Llama and other US efforts have fallen behind. “China is well ahead — way ahead on open-source,” Nvidia Corp. CEO Jensen Huang said earlier this month.

Zuckerberg has long maintained that giving the public access to emerging tools and technologies, particularly in AI, strengthens Meta’s products and encourages wider adoption. He’s likened Meta’s open-source approach for AI to Google’s Android operating system for smartphones. While Meta already builds some closed models for internal use, and Zuckerberg has teased the idea of developing other closed models in the past, several iterations of Meta’s current flagship AI model, Llama, are open-source.

On an earnings call with investors in late July, Zuckerberg hinted that the company would pursue both open and close models moving forward. (…)

The Bloomberg article goes on discussing Zuck’s leadership of its “elite” AI team.

But it missed the most important stuff: Meta ditching Llama for Alibaba’s Qwen LLM. Karl Zhao explained:

(…) What’s interesting isn’t just that Meta is using Qwen. It’s why:

Qwen has quietly become one of the most influential open-source models in the world. It’s already powering major US companies like Airbnb. Its rapid adoption highlights how global AI innovation has become.
Meta is reportedly “distilling” Qwen and other open models to accelerate Avocado’s training. Distillation isn’t illegal, but it raises ethical concerns in the AI community. Earlier this year, OpenAI publicly criticized DeepSeek for doing something similar.
The US–China AI gap is narrowing faster than many predicted. Alibaba’s open-source ecosystem is scaling rapidly and increasingly challenging Western hyperscalers in capability and developer mindshare.

That Airbnb and Meta’s Facebook and Instagram use Chinese open models highlights where China currently stands on AI: as good if not better, open and much cheaper. It also makes it problematic for the US to ban Chinese products or American products using Chinese AI.

From The South China Morning Post last week:

(…) Chinese-made models made up 17 per cent of total open model downloads in the past year, the data [from Hugging Face and MIT] showed, compared with 15.8 per cent for US-made models. Qwen and DeepSeek alone captured 14 per cent of downloads. (…)

According to leading third-party benchmarking firm Artificial Analysis, Qwen models scored highly on a new index that ranked models based on their combined openness and intelligence, in contrast to leading closed US models such as OpenAI’s GPT-5 and Google DeepMind’s Gemini 3 Pro, which had top scores for intelligence but low scores for openness.

In contrast, Meta was now looking set to abandon its open-source strategy, with Bloomberg reporting that the Avocado model could be released as a closed model despite CEO Mark Zuckerberg claiming in July last year that his company would continue on the open-source path.

“Meta is committed to open source AI,” he wrote at the time. “Open source AI is good for the world.”

Right!

China Points to Risk of Clash With US After Taiwan Arms Package

The military assistance served to “put the people in Taiwan on a powder keg, push the Taiwan Strait toward danger and inevitably increase the risk of China-US conflict and confrontation,” Foreign Ministry spokesman Guo Jiakun said at a regular press briefing in Beijing on Friday.

“Any move of arming Taiwan will face serious consequences,” he said, adding that Beijing had filed a diplomatic complaint with Washington. Guo again said his nation “will take all measures necessary to safeguard national sovereignty and territorial integrity,” without elaborating.

Also Friday, China’s Defense Ministry said it would “continue to intensify training and preparations for combat.” The military would “take strong measures to safeguard national sovereignty and territorial integrity,” the ministry added in its statement.

Thee comments come after the State Department approved one of the US’s biggest ever sales of weapons to the democracy, a package that included missiles, drones and artillery systems. The sale signals that the Trump administration wants to maintain its strong defense ties with the island even as it boosts its trade and economic relationship with China. (…)

Taiwan, primarily through Taiwan Semiconductor Manufacturing Company, manufactures 90% to 92% of the world’s most advanced semiconductors (7-nano or less). Currently, the US produces none of these advanced chips domestically, in total reliance on Taiwan for these critical chips.

U.S. Unemployment Rose in November ​Despite Job Gains The 4.6% rate is the highest in more than four years, according to a delayed government report

A long-delayed government report on Tuesday showed that 64,000 jobs were gained in November, while 105,000 jobs were lost in October. Job losses in June, August and October mean the U.S. economy has shed jobs in three out of the past six months. (…)

Taken together, the data point to one of the weakest American labor markets in years. While the economy has added jobs so far this year, mostly on the back of gains in healthcare and education, the shock of shifting trade policies and an immigration crackdown has restrained labor demand and supply, making for tepid hiring overall.

“All roads lead back to policy out of Washington, D.C.,” said Joseph Brusuelas, chief economist at RSM. “I’m not saying this is a harbinger of a recession, but we have some real challenges to the economy that we didn’t have one year ago.” (…)

The Labor Department revised down payrolls for both September and August, for a total gain of 82,000 jobs, instead of the 115,000 previously reported.

Taking out the impact of the government sector, the economy then added 121,000 private sector jobs over October and November. Those were driven by the healthcare and social-assistance sector, which gained 128,600 jobs. Manufacturing, transportation and warehousing and temporary-help services were among the sectors shedding jobs. So did the typically white-collar information and finance sectors. But the construction sector gained 27,000. (…)

Overall, economists describe the current labor market as a low-fire, low-hire environment. Most companies aren’t laying off workers en masse. But they also aren’t willing to hire too many new workers. Many employers that typically rush to hire seasonal workers at this time of year are sitting tight. Others are experimenting to see how many job tasks can be replaced by artificial intelligence.

Earnings growth continued to slow, with hourly earnings in the private sector rising 3.5% from a year earlier. Outside of pandemic-era distortions, it was the lowest rate of growth in several years—a factor that could be adding to many Americans’ sense of disillusionment with the economy. (…)

Indeed:

The combined two-month report shows notable declines in employment in October as tens of thousands of government employees who had remained on payrolls through the summer finally came off as their buyout deals took effect. Job growth rebounded in November, but was weak overall, with continued growth in healthcare and certain trades jobs, and weaknesses essentially everywhere else. Certain healthcare roles now account for virtually all of this year’s job growth, a worrisome concentration that is helping to push up unemployment overall as non-healthcare workers struggle to enter the market.

The economy as a whole has added 499,000 jobs on net since the start of the year — and 630,000 of them have come from the private education and health services sector. Put another way, without this sector, the overall labor market would have actually lost 131,000 jobs so far in 2025. Needless to say, this limited job growth is very problematic, especially for workers in other sectors who don’t want or are not qualified for these jobs. Sidelined workers are showing signs of turning to temporary or gig work to get by — the share of workers with multiple jobs has risen to 5.8%, the highest level in more than 25 years, representing almost 9.5 million workers. (…)

Manufacturing, transportation and warehousing, and financial activities jobs all saw declines again in October and November, a pattern that has become commonplace this year. It is difficult not to attribute at least some of this weakness to tariff policy, and potentially even more to the uncertainty surrounding it. Manufacturing sub-sectors, including machinery manufacturing, electronics manufacturing, and transportation equipment manufacturing, have each lost more than 10,000 jobs in the last year and are all relatively exposed to tariffs on both their final goods and the intermediate goods used in production.

The least we can say is that the labor market has become very erratic. Since May, only 17k monthly jobs were added on average. On a YoY basis, employment is up 0.6%, half of its January growth rate. Remember that Powell said that  job creation numbers could be overstated by around 60,000 per month.

Weekly earnings are rising 3.5% YoY. Aggregate weekly payrolls were up 4.3% YoY in November thanks to a suspect jump in hours worked. Labor income is really rising at a 4.0% rate and weakening while inflation is nearing 3.0%.

Total real consumer spending could slow to a 1.0% annualized rate unless Americans sustain consumption with savings.

Total retail sales were flat MoM in October after +0.1% in September, a sharp slowdown from the June-August pace of +0.7%. The 3.5% YoY October growth pales versus the +4.4% average growth of the previous 4 months.

Wells Fargo:

On the face of it, the retail sales report for October was a dud, but the underlying details offer more encouraging signals for Q4 consumer spending and an elevated starting point for the critical two-month stretch for holiday sales.

The headline miss (0.0%) is entirely due to autos, which slipped 1.6%, reflecting payback after a pull-forward ahead of tariffs and then expiring tax credits.

Ex-autos, sales surprised to the upside and control group sales, which track well with broader goods consumption, came in even stronger (up 0.9%), suggesting a more solid start to Q4 consumer spending than our 1% CAGR forecast accounts for.

Ultimately these October data and early estimates of Black Friday weekend sales suggest a decent pace of holiday spending, which is now tracking in the middle of our 3.5-4.0% annual range.

That said, other high-frequency data suggest some slowdown through mid-December and leave us cautious on how the consumer crosses the finish line. This lost momentum at year-end is also in line with a key theme from our holiday sales forecast amid the steady moderation in the jobs market plus compounding nature of price gains weighing on households’ ability to spend.

Source: U.S. Department of Commerce, Bloomberg Finance L.P. and Wells Fargo Economics

Bank of America Institute provides a preview for November:

In November, total credit and debit card spending per household increased by 1.3% year-over-year (YoY), according to Bank of America aggregated card data – a dip from 2.4% YoY in October. Seasonally-adjusted (SA) spending growth per household was flat month-over-month (MoM), after a solid run of increases over the previous five months.

Looking across categories, retail spending (excluding gasoline and restaurants) was flat MoM, while services spending (including restaurants) declined. Within services, travel spending, including airlines and lodging, also saw declines, potentially in part reflecting an impact from the government shutdown. However, despite the recent decreases, “discretionary” outlays such as travel and entertainment have still shown solid growth over the past quarter.

Spending trends by income continue to show a K-shaped pattern: in November, lower-income households saw just 0.6% YoY growth in their three-month average total card spending, compared to a 2.6% increase for higher-income households.

While spending gains softened across all income cohorts in November, middle-income households moderated the most, with spending growth up 1.4% YoY compared to the 1.7% YoY increase in October.

Labor market trends likely remained a key driver, even as wage growth has stabilized a bit. After-tax wage and salary growth among lower-income households continued to lag behind higher-income households. However, the deceleration in lower-income wage growth seen in the spring and summer appears to have leveled off.

 

An important question is whether holiday spending growth reflects higher prices or increased purchasing activity. Exhibit 10 suggests the latter: most of the growth appears to be driven by more transactions, with average spending per transaction on holiday items showing little change. In other words, it appears that consumers are actually making more purchases as opposed to just spending more.

Why might this be? For one, price increases on holiday items relative to last year could be limited, though this seems relatively unlikely given that commonly bought holiday goods like clothing and durables (e.g., electronics and furniture) have been impacted by tariffs. Interestingly, the spending amount and the number of purchases grew at a similar rate YoY for clothing. However, consumers spent more YoY at general merchandise stores, but made slightly fewer purchases, while spending on holiday durables declined with transactions down further.

In our view, it may be that consumers are becoming more price sensitive – and selective – this season, especially given stubbornly elevated inflation and potential price increases due to tariffs. This is likely as shoppers often have a total spending goal in mind for gift giving, so in the face of higher prices they are economizing. It could also be that some retailers are absorbing some cost increases while others have passed them along to consumers.

Faced with cost-of-living pressures, are consumers purchasing more on credit to see them through the holidays? So far, Bank of America internal data suggests this is not the case. The share of total spending on credit versus debit cards has remained unchanged in the four weeks to November 28, compared to the same period in 2024. This is also the case with total retail spending.

Bloomberg’s Joe Weisenthal:

Here is a literal picture of the number of unemployed workers in America. As you can see from the red bars (which indicate recession) history suggests that when we see moves like this we usually experience a recession before the trend reverses.

Goldman Sachs:

Congressional Republicans could pass another fiscal package in 2026 to provide additional stimulus, but we think the hurdles to doing so are high. President Trump’s proposed $2000/person tariff rebate has not gained traction among congressional Republicans, given fiscal concerns and, in some cases, opposition to the tariffs that would ostensibly fund them. While we think the odds are slightly better than even that Congress extends soon-to-lapse health insurance subsidies next year, this is unlikely to become the basis of a second package. Some officials in the Trump administration have also proposed passing a second “reconciliation” bill to further boost defense spending, which bears watching but also faces an uphill climb.

SURVEYS SAY:

• Deloitte polled 200 CFOs at North American companies with at least $1 billion in revenue from Nov. 14 – Dec. 8.

Chief financial officers’ confidence in the final quarter of 2025 hit its highest point since 2021, according to Deloitte’s CFO Signals survey out Wednesday morning.

Confidence rose to 6.6 in the fourth quarter from 5.7 in the previous quarter and 5.8 a year ago — considered medium levels.

“When you take a step back and look at the main drivers of the macroeconomy that a CFO needs to contemplate, those things are probably as settled as they’ve been in the last five or six quarters,” Steve Gallucci, global and U.S. leader of Deloitte’s CFO program, tells Axios.

Adapted from Deloitte’s CFO Signals report; Note: Measured as an average score from 1 to 10, where 1 is lowest confidence; Chart: Axios Visuals

• Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta polled 548 respondents from Nov. 11 to Dec. 1.

When asked between Nov. 11 and Dec. 1 to rate optimism about the overall U.S. economy on a scale from 0 to 100, the average rating from CFOs was 60.2, a slight dip from 62.9 in the third quarter of the year.

CFOs’ expectations for real GDP growth over the next four quarters remained relatively unchanged from the third quarter survey. Moreover, the probability respondents assign to negative year-ahead economic growth also remained the same, at 13.6 percent.

• NY Fed Business Leaders Survey

Business activity continued to decline significantly in the region’s service sector in December, according to firms responding to the Federal Reserve Bank of New York’s Business Leaders Survey.

The survey’s headline business activity index was little changed at -20.0. The business climate index drifted down to -44.2, suggesting the business climate remained much worse than normal.

Twenty-two percent of respondents reported that conditions improved last month while 42 percent said that conditions worsoned.

Employment fell for a fourth consecutive month, and wage growth remained modest. Supply availability continued to worsen somewhat. Both input price increases and selling price increases picked up after slowing last month.

Looking ahead, firms expected little improvement in conditions over the next six months.

• PIES is a quarterly survey of firms in the Third District (Philly Fed) that helps to provide a better understanding of the price expectations of businesses. The survey asks participants to provide forecasts of changes in prices for their own goods or services, compensation for their employees, and U.S. inflation. Respondents are also asked to report the change in prices of their own goods or services they observed over the past year.

For the fourth quarter of 2025 through the fourth quarter of 2026, the firms’ mean forecast for their own prices was for an increase of 2.6 percent, down from 3.3 percent last quarter. Firms expected compensation costs per employee to rise 3.3 percent over the same time period, unchanged from last quarter. The mean forecast for U.S. inflation was 3.6 percent, down from 4.7 percent last quarter.

Looking back over the past year (the fourth quarter of 2024 to the fourth quarter of 2025), firms reported that the prices they received for their own goods and services rose 3.0 percent, little changed from the 2.9 percent they reported last quarter and higher than the 2.6 percent growth they expect over the next four quarters.

For the longer run, firms’ median expectation of the average annual price increase that U.S. consumers will experience over the next 10 years moved up to 4.0 percent, following nine consecutive quarters at 3.0 percent. The mean expectation dropped to 6.1 percent from 9.3 percent, after rising in five consecutive quarters.

• Trump’s approval rating on the economy hits record low 31%

The survey, conducted from Dec. 4-8, sampled more than 1,100 adults mainly via web interviews.

• 68% of voters — including 44% of Republicans — say the economy is in poor shape.
• About half of Americans say it’s harder than usual to afford holiday gifts this year.
• About half say they are cutting back on nonessential purchases more than they usually would.
• A “vast majority” report seeing higher prices for groceries and electricity, underscoring a persistent cost-of-living strain.
• About 4 in 10 U.S. adults expect next year will be economically worse for the country. Roughly 3 in 10 say conditions won’t change much. Only about 2 in 10 think things will get better, with Republicans being more optimistic.

From The Transcript:

• “And so as we look at the data right now, the data looks good, consumers look resilient, small businesses are resilient, but there’s less capacity to weather an incremental stress because cash buffers have normalized and price levels absolutely are high even as inflation has come down at least. So I would just say that I would characterize the environment as being a little bit more fragile.” (…) “Yes, there is a divergence in spend growth between higher income customers and lower-income customers, but that relative level of spend growth is a sort of relatively normal trend. And so it’s not diverging nor is it narrowing? It looks pretty normal. And so I don’t want to discount their concerns. They are real. And — but the data is good for right now.”– JPMorgan Chase & Co Head of Strategic Growth Marianne Lake
• “We haven’t seen anything at this point that would lead us to believe that there’s any sort of credit cycle or any softening. We watch it very, very carefully.” – American Express CEO Stephen Squeri
• “You know, we are a very middle-income, lower-income, main street America sort of consumer base in our portfolio. We also skew retail and a little bit more discretionary. And when you look at that, we continue to see consumers spending less, trading down, average order values down, and just a shifting in that space. That has persisted.“ – PayPal CFO Jamie Miller
• “In terms of the flow-through and what we’ve seen in the overall marketplace, we continue to see sort of pressure in the apparel space. We held share in premium athletic and lost some slight share in the performance apparel as we see guest behavior and trading down.” – Lululemon athletica Inc. CEO Calvin McDonald
• “Here’s still this divergence between the more affluent, the less affluent. Nothing is new there. Nothing has changed. It certainly isn’t spreading to any real extent. And spend patterns seem very, very consistent across age groups, across geographies and things like that.” – Wells Fargo & Company CEO Charles Scharf
• “The way they’re spending the money has a little bit of the elements of the K economy to it, not as much as people think if you actually watch what’s happened over the last few months in 3 terciles, the bottom terciles has been growing at a slower rate, still growing.” – Bank of America  CEO Brian Moynihan

Inflationary Pressures Appear Contained, Bank of Canada’s Macklem Says The central bank’s governor expects the upheaval in global trade and the restructuring of Canada’s economy to dominate again in 2026

In a year-end speech in Montreal, Macklem said he expects the upheaval in global trade, fueled by President Trump’s tariffs, and the restructuring of Canada’s economy to dominate again in 2026. He reiterated that the central bank’s policy interest rate, at 2.25%, is “at about the right level” to support the economy through a period of modest growth while keeping inflation in check.

Inflation data for November, published on Monday, indicated total prices rose 2.2% from a year ago. Meanwhile, the average of the Bank of Canada’s preferred measures of core inflation—which strips out volatile prices like food and energy—decelerated to 2.8%, marking the slowest increase since January. The central bank sets interest rates to achieve and maintain 2% inflation, or the midpoint of a 1% to 3% range.

The central bank judges underlying inflation to be in the 2.5% range.

“Inflationary pressures continue to be contained despite added costs related to the reconfiguration of trade,” Macklem said in remarks before Montreal’s chamber of commerce. He added he expects inflation to remain close to 2% for the next two years. (…)

“It’s critical that we keep inflation expectations well anchored,” he said, “because one thing we know for sure is if we don’t do that, nothing in the economy is going to work well.”

Hefty U.S. tariffs of up to 50% on key sectors such as steel, aluminum and automobiles are weighing on the domestic manufacturing sector, Macklem said. “But so far, the economy is proving resilient overall.” (…)

Chip Shortage Lingers as Honda to Halt Output in Japan, China

The Japanese carmaker will suspend output in Japan on Jan. 5 and Jan. 6, a spokesperson said Thursday, without specifying which plants will be affected. All three of the facilities in its joint venture in China, Guangqi Honda Automobile Co., will be offline from Dec. 29 to Jan. 2.

The company had said it anticipated getting disrupted production back on track from late November, but the looming suspension of some of its factories indicates ongoing snarls in the supply chain. (…)

Carmakers around the world have had their production plans thrown into disarray in recent months after China blocked Nexperia BV — owned by Chinese company Wingtech Technology Co. — from exporting products made at its local plants.

Honda has been hit hard, with the chip shortage prompting it to reduce its sales forecast to to 3.34 million units from 3.62 million. It had previously curbed or suspended output at some plants in North American due the issue.

Nexperia makes semiconductors used in vehicle control systems for functions such as activating windshield wipers and opening a window.

FYI:

Source:  @RyanDetrick

• New White House plaques attack Trump’s Democratic predecessors, Bush

President Trump has added partisan plaques under the portraits along his new Presidential Walk of Fame on the White House colonnade. White House Press Secretary Karoline Leavitt said: “As a student of history, many were written directly by the President himself.”

Student of history?

• During a 2019 July Fourth speech, Trump claimed the Continental Army “took over the airports” from the British in 1775, though the first successful powered flight did not occur until 1903.
• In the same 1775 context, he referenced the Battle of Fort McHenry, which actually took place during the War of 1812.
• He has repeatedly stated that the “Spanish Flu” pandemic occurred in 1917 and contributed to the end of World War I; historical records show it began in 1918 and World War I ended due to military and political developments, not the virus. (Google)