The American job market is currently experiencing an unusual phenomenon characterized by a striking juxtaposition of job growth and rising unemployment rates, as highlighted by recent non-farm payroll data from NovemberThis unexpected situation adds layers of complexity to the upcoming December monetary policy meeting of the Federal Reserve, drawing attention from global investors who are keenly observing these developments.
According to the Bureau of Labor Statistics, the non-farm payroll employment figures for November exceeded forecasts dramatically, revealing an increase of 223,000 jobsThis represents a considerable overperformance compared to the analysts' estimates of just 196,000, marking the highest growth for any single month since April 2024. Notably, the healthcare and social assistance sectors led the charge, contributing approximately 45,000 new positions, with the education services industry adding 38,000 jobs—indicative of a resilient recovery within service-oriented sectors
Advertisements
Surprisingly, despite a string of declines over three consecutive months, manufacturing managed to gain back 12,000 jobs, primarily fueled by a rebound in the automobile manufacturing sector as strikes concluded and production capacity began to be restored.
However, this strong job creation comes with an unsettling twist as the unemployment rate unexpectedly jumped from 3.9% to 4.2%. Moreover, the labor force participation rate also declined, hitting a recent low of 62.3%. This paradox of simultaneous job growth and rising unemployment signals deeper underlying issues within the labor marketWhile demand for workers remains robust, with job vacancies still in the vicinity of 9.8 million, long-term unemployment saw an increase of 125,000, leading to a total of 1.8 million persons facing prolonged joblessness, alongside a youth unemployment rate surpassing 8.5%. Analysis from J.PMorgan indicates that the declining participation rate is chiefly due to those aged 55 and above opting to withdraw from the labor force, contributing to what now constitutes 24.7% of this demographic—a record high.
As analysts grapple with this perplexing array of data, opinions among mainstream research institutions regarding the Federal Reserve's December policy outlook are displaying subtle divisionsA report from Guosheng Macro emphasizes that the resilience demonstrated by the job market creates a certain buffer that allows for normalization of monetary policyThey predict that the Federal Reserve will announce a 25 basis point rate cut during their December meeting, with the possibility of two additional cuts in the first half of 2026. They particularly point to positive signs within corporate debt markets—evidenced by a tightening gap in high-yield bonds—and improvements in household balance sheets, such as a climbing savings rate of 4.1%, as key enablers for this anticipated easing.
Conversely, Citic Securities adopts a more cautious stance, arguing that the core PCE price index lingers around a relatively high 2.8%, while rent prices have escalated 5.3% year-over-year, which could present potential obstacles to rate cuts
Advertisements
This institution suggests monitoring the Consumer Price Index (CPI) data set to be released on December 13; if core CPI sees a year-over-year decline below 2.5%, the probability of easing monetary policy would significantly riseFurthermore, the macro team from CMB has utilized a DSGE model and noted that the current slope of the Phillips Curve for the job market has decreased to 0.08 (down from 0.25 in 2022), illustrating that a more substantial increase in the unemployment rate will be required to effectively curb inflation.
Challenges confronting the Federal Reserve's decision-making extend well beyond mere data interpretationPrimarily, risks associated with financial stability are becoming increasingly evident: the dividend yield on the S&P 500 index has plummeted to 1.8%, creating an inversion with the yield of 10-year Treasury bonds at 4.2%, which may suggest impending pressure on asset pricesFurthermore, the New York Fed's Financial Vulnerability Index has soared to 0.65, reaching the second-highest level since 2008. Additionally, there is rising concern regarding the sustainability of federal debt, with interest payments now representing over 12% of total federal revenue, and costs associated with municipal and local government debt insurance reaching historical peaks.
On an international scale, geopolitical dynamics intensify the complexity of policy responsesThe implementation of the European Union's carbon tax mechanism is likely to inflate the export costs for U.S. manufacturing by 3-5%. Simultaneously, the interest rate hikes by the Bank of Japan could spark the unwinding of yen carry trades, further tightening dollar liquidityGlobal macro strategists from BlackRock indicate that the current divergence in central bank policies—measuring the difference in the direction of major central bank policies—has surged to 68, the highest level since 2015.
The U.S. economy is undergoing a painful structural adjustment
Advertisements
The Atlanta Fed's GDPNow model forecasts that the GDP growth rate for the fourth quarter will decelerate to 1.4%, a notable drop from 2.1% in the third quarterAt the corporate level, capital expenditure growth among S&P 500 constituents has now declined for five consecutive quarters, while the inventory-to-sales ratio has risen to 1.32, the highest mark since 2021. Although the consumer confidence index for households shows signs of rebound, the credit card delinquency rate has breached 4.2%, and auto loan defaults have climbed to 5.8%.
Nonetheless, there are positive indicators signaling an economic transformation in processInvestments in clean energy are soaring with solar and wind equipment orders spiking by 38% year-over-year in NovemberFurthermore, sales of electric vehicles have breached an 18% market shareThe pace of artificial intelligence technology application is accelerating, with McKinsey projecting that generative AI could add between $2.6 trillion and $4.4 trillion in economic value to the U.S. economy by 2030. Such structural changes may redefine the Federal Reserve's assessment of the longer-term neutral interest rate.
Expectations regarding Federal Reserve policy are undergoing a seismic shift in financial marketsThe CME Group's FedWatch tool illustrates that the probability of a rate cut in December has surged from an initial 35% to an impressive 78%. However, the implied cut magnitude for 2026 has narrowed from 150 basis points to 100 basis points, revealing concerns about restricted policy spaceNotably, the inversion between the two-year Treasury yield and the federal funds rate has reached an alarming 80 basis points—historically, scenarios such as this typically arise toward the conclusion of a tightening cycle.
The global asset allocation landscape is undergoing a much-needed realignment