US Strategy Weekly: Don’t Believe All Google Searches

As expected, the Federal Reserve lowered interest rates by 25 basis points at its December meeting. It was the third consecutive meeting with a rate cut, and it brought the fed funds rate down to a range of 3.5% to 3.75%. The committee indicated that it anticipates one more quarter-point cut in 2026. The Fed also increased its median forecast for real 2026 GDP to 2.3%, up from 1.8% in September and 1.6% in June — and we believe this forecast will still prove to be too low. Unemployment expectations were unchanged and the core personal consumption expenditure inflation forecast fell slightly to 2.5%, a pace we believe could be on the high side for 2026.

At his press conference, Chairman Powell noted that “goods inflation remains elevated and the impact of tariffs remains a risk for future inflation.” We fail to see this in the numbers. Headline and core CPI have been hovering at the 3% level after rising from a 2025 low of 2.3% in April. However, goods inflation remains much lower at 2%. Even though Google states that “auto tariffs are taxes imposed on vehicles and components … raise vehicle costs for consumers, increase insurance/repair expenses, and disrupt complex global supply chains, leading to higher prices on new cars, even impacting U.S.-made ones due to imported parts.” The data shows that the price of a new auto rose a mere 0.8% YOY in September, up from minus 0.3% YOY in January. On the other hand, the broad service inflation index remained elevated at 3.7% YOY in September, down a bit from 3.9% in January. It is true that the CPI index for motor vehicle maintenance and repair was high at 7.7% YOY in September (down from 8.5% in August). But it is also true that it peaked at 14% YOY (nearly double the current level) in January of 2023, well before any tariffs were in place. See page 3. In short, recent maintenance pricing may be more “opportunistic” due to recent tariff mania, than due to imposed tariffs. We continue to point out that tariffs are not taxes. Taxes cannot be avoided. Tariffs can be avoided since consumers usually have the choice of alternative products. Moreover, tariffs are often absorbed or mitigated by foreign producers, foreign governments, intermediaries, and domestic sellers, well before they reach the consumer. This is not true of taxes. November CPI data will be released later this week.

Delayed releases are being reported this week and the most important of these is employment. November employment increased by 64,000, which was above expectations, however, it was offset by a loss of 105,000 workers in October. Federal jobs declined by 6,000 in November and a massive 162,000 in October. The October loss included federal employees who accepted a deferred resignation offer which became effective in October. August data was also revised down by 22,000 and September was revised down by 11,000. After all these revisions the 6-month pace of job growth fell from 53,000 in September to 16,670 in November. The year-over-year rate of change was 0.6% in November, down from 0.8% in October and quickly approaching a dangerous negative level. This decline in job growth is a big concern of ours since year-over-year declines in employment correlate highly with recessions. Moreover, the BLS has already announced its annual benchmark revision will be published with January’s employment report. It is estimated to lower total employment by 911,000.

In contrast to the establishment survey, the household survey showed employment increased by 323,000 in November. However, the household survey was not done for October, and this could be an estimate for November. This series can also be volatile, so we are not sure how to incorporate it into our analysis.

The household survey also includes the unemployment rate which rose to 4.6% from 4.4% in September. See page 4. However, while the regular unemployment rate rose from 4.4% to 4.6% the U6 unemployment rate which includes marginally attached workers plus total employed part-time for economic reasons rose from 8.0% to 8.6%. In line with this, discouraged workers rose to 681,000, the highest level since July 2020. In short, the job market is clearly weakening. See page 5.

People working part time for economic reasons rose by 909,000 to 5.49 million in November. October data was not available, so this change was between September and November; however, the 5.49 million was the highest level since the 5.8 million reported in January 2021 in the post-pandemic era. The brightest part of November’s report was that total average weekly earnings rose 3.5% YOY and earnings for production and nonsupervisory employees rose 4.2% YOY. Both were above the rate of inflation. Average weekly hours for private industry workers increased from 34.2 to 34.3 hours. See page 6.  

The employment cost index (ECI) was 3.6% in the third quarter, unchanged from the first and second quarters, but down from 3.9% seen a year earlier. It is also down substantially from the 5.1% peak seen in the second quarter of 2022. The ECI is likely to continue to fall as the implementation of AI expands and raises productivity. This will be good news for employers, corporate earnings and for inflation. Labor costs are the largest expense for most businesses and the gap between labor costs and inflation (the ability to pass on these costs) is narrowing, which is a favorable trend and a positive for future earnings. See page 7.

However, in terms of the ECI, there is a distinct difference between private and government workers compensation and costs. According to the BLS, as of June 2025, total compensation for civilian workers averaged $48.05 per hour worked. Total compensation costs for private industry workers averaged $45.65 per hour worked and state and local government workers averaged $63.94 per hour worked or were 40% higher. Within employer costs, benefit costs averaged $15.03 per hour worked for all civilian workers in June 2025, $13.58 per hour worked for private industry workers and $24.63 per hour worked for state and local government workers. This means benefits costs were 80% higher for government workers than private industry workers. This differential does not get much publicity, but perhaps it should. There were also big differences between paid leave, insurance costs, and retirement benefits, with costs for government workers much higher than for private workers. See page 8.

It is also worth noting that the federal deficit for November was $173.3 billion, down roughly 50% from a year earlier. The fiscal deficit year-to-date is $457.6 billion, down 25% from a year earlier. The reduction materialized from a combination of higher tax receipts and lower outlays. This is an important statistic for the debt markets, since this administration inherited deficits that were running at 7.2% of GDP in January. The current 12-month deficit through November was 5.3% of second quarter nominal GDP. This is an impressive accomplishment, and we believe GDP will be much higher in the third and fourth quarters – which means the ratio to GDP is even lower. The trade deficit also improved in September to negative $52.8 billion after peaking at negative $136 billion in March. This is decline in the trade deficit will translate into a higher GDP in the third quarter. All in all, while eyes are focused on the weak employment report and the upcoming CPI report later this week, there was good news in the cost of labor and the twin deficits. We remain a buyer of dips.

Gail Dudack

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