Fed Watch – 12/19/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker and thank you so much for joining us for this December 19th edition of Fed Watch. Closing out the year 2025 and what a year it has been. We rounded out this week with a little bit of long delayed data.

We finally got our November jobs report that came in earlier this week. Headline number was about 64,000 jobs created. But if we look beneath the surface there, that’s where this even lower number didn’t feel all that great.

The biggest gains were actually in the healthcare segment, which as we’ve talked about before, healthcare is a little bit less correlated to the macro cycle. This wasn’t like jobs created in manufacturing or in the retail sector.

So we do still have a pretty rosy outlook on healthcare here at ITR Economics. That’s a long-term view. It’s going to be driven a lot by demographic changes by the aging population. But to see the biggest contributor to this jobs numbers coming in healthcare, that’s not the best signal that we could have from a macro outlook.

Unemployment rate, that did also tick up. Still, I would consider this nothing to worry about too much. Again, we’ve talked a lot on this show about the difference between the jobs report, those numbers of jobs created, which are running a little bit lower these days due to factors like immigration, and that overall balance in the labor market.

So let’s not focus on the headline numbers here. Let’s focus on the direction of travel. Yes, the labor market has loosened slightly, but demographic trends are still keeping it very tight and will continue to do so into next year and beyond.

I also want to remind our viewers today that hiring decisions, these are very often reactionary. So 2025 was a year with a lot of uncertainty, a lot of even outright pessimism. That’s going to mute employment growth in especially the first half of next year before we start to see that momentum build.

On a net basis, we’re still running with a generally balanced labor market in terms of one unemployed worker for every one job opening out there. A lot of key skill sets are still missing in certain sectors, right?

There are others that are maybe a little bit more robust. So know your own industry, know where that break-even point is for you. But generally speaking, we are looking for a marginally tighter labor market to come next year and even beyond.

But let’s turn to the data point that we got on Thursday. That was the CPI result. Came in at 2.7%, which did come a little bit lower than many consensus estimates. However, 2.7%, that still is holding water.

This is certainly higher than the Fed’s 2% target. So we’re seeing this inflation remain persistent. We at ITR have been warning you that there are very fundamental factors in place from accommodative fiscal and monetary policy, from the wage pressures of that relatively tight labor market, from electricity and energy costs rising.

We’re starting to see those factors really come to fruition even when you take something like tariffs off the table. So I think this CPI, we have essentially reached the turning point. And our view is for 2026 for much higher inflation.

Not getting back to those 9% highs that we saw in 2022, but our full year 2026 forecast is for CPI to come in up 4.1%. That’s a good deal hotter than we’re running right now. That’s also hotter than many consumers will feel comfortable.

So you need to know what that means for your own pricing strategy. Looking ahead at the data calendar, next week on December 23rd, just in time for Christmas, we’re going to get some GDP numbers. Quick reminder, these are very much backward looking at this point.

This will be the third quarter GDP numbers. What we really need to look at going forward is the leading indicators. Those are critical to know for your industry and your business. It will be very interesting to get the GDP result.

We will be unpacking those numbers in the weeks to come. But as we look at what this means for U.S. growth going forward, keep in mind that the fundamental factors that have long been in place are continuing to show growth.

It’s just that slower, that much more moderate pace of growth. Our full year 2026 real GDP forecast is for 2.1% growth. This is healthy, but it is a little bit moderate. So as we look ahead, business spending, that should accelerate in 2026.

Businesses have ample cash balances. Moderate interest rates are going to help them out. We also think that a lot of these businesses have been through the highest level of uncertainty already. That’s now in the rearview mirror.

That’s now behind us with trade policy and other policy uncertainty much more likely to abate in 2026 compared to this year. We’re also seeing some improvement in inventory turns. That’s a good sign.

Business activity is picking up, especially across the durable goods sector. That prior inventory glut is largely clearing out. So we do have these fundamental factors in place for growth in the next couple of years.

If you haven’t had a chance yet to watch the webinar that Brian Volio and I did, it was just earlier this week. We go into some of those growth drivers, what’s going to carry us through the next five or so years until we reach that 2030 timeframe.

We’ll put a link to that recording in the notes to this show if you are interested in seeing that longer term view. But until then, we will be off next week for the Christmas holiday. We’ll see you all back in the new year and we’re going to dive in together into 2026. Please join us again. Thank you.