Fed's Critics Proven Right With Latest Labor Market Data

The Bureau of Labor Statistics (BLS) released that agency's labor market surveys for the month of November on Tuesday morning. The BLS also released what October data it had available, which was incomplete due to the government shutdown. The numbers paint the picture of a labor market showing signs of waning demand for labor without going off of a cliff. Stable deterioration is still deterioration.

October retail sales also hit the tape on Tuesday morning. While not awful, those numbers were awful in spots. Put together, it would appear at this point to be quite obvious that the critics were right again, and that the FOMC under Fed Chair Jerome Powell was indeed late again, having failed to react to what appeared to be cracks in what had been a muscular labor market. 

Powell's FOMC also failed to realize that the somewhat mythical "neutral rate," which is where interest rates are neither restrictive nor accommodative, had for all this time been well below the levels at which the target range for the federal funds rate had been kept. Powell finally cut that rate in September after being warned for most of 2025 that the economy was growing fragile.

Sadly, through July, the national CPI, also compiled by the BLS, had run well below where it had been when Powell's Fed had been actually cutting rates in 2024. Hence, a golden opportunity to balance inflation and full employment at an advantageous time, economically, had been missed. It already was, but now it has become impossible to defend this Fed, this FOMC and this Fed chair. Especially after running the quantitative tightening program for several months beyond when it became apparent that bank reserves were approaching levels of concern and that liquidity could become a problem.

Job Creation 

Non-Farm Payrolls, which we know will be revised in coming months, told a sorry tale on Tuesday morning. At the headline level, according to the Establishment Survey, the U.S. economy lost 105,000 jobs in October, then added 64,000 jobs in November. The interesting thing about this is that in October, 157,000 government employees lost their jobs, while 52,000 private sector jobs were created. For November, another 5,000 government jobs were lost, while 69,000 private sector jobs were created. 

Is this all bad? No. While it's awful that net 162,000 government jobs were lost, it is undeniable that federal payrolls had become grotesquely bloated in recent years and that put artificial downward pressure on the rate of unemployment. The fact that the private sector, which is far more important to the economy than the public sector, has continued to create jobs, but not a lot of jobs, is a very mild positive. 

Can the private sector absorb the increase in demand created by layoffs in the public sector? That's difficult to say. There's not a lot of apples-to-apples comparison there. Additionally, moving from the slow pace of government work with its vacation time, sick days, health insurance and pension plans will be a cruel wake up call for individuals who may have had no idea how "dog eat dog" the real world is. Private sector employers might also be slow to take on folks that have never been driven to create profitability, at least not at lateral positions.

Key Data

The Unemployment Rate, which is drawn from the Household Survey, moved higher in November from 4.4% in September, to 4.6% as participation increased. Participation grew from 62.4% in September to 62.5% in November as 323,000 net individuals entered the labor force over two months. 

Still drawing from the Household Survey, the number of employed persons grew by 96,000 souls over those two months as the number of unemployed persons increased by 228,000. The Employment-to-Population Ratio dropped from 59.7% two months earlier to 59.6%.

Check this out too, because this is important: The number of individuals working part-time for economic reasons increased by 909,000 persons since September while the number of individuals working part-time for non-economic reasons increased by 370,000 persons. That's 1.279 million new part-time jobs despite job creation of just 96,000 positions.

The implication? Almost 1.1 million individuals likely lost full-time jobs as their employers cut their hours, reducing them to part-time status. That's huge. That also took the Underemployment Rate (U-6 unemployment), all the way from an even 8% in September to an alarming 8.7% in November.

There is no way to sugarcoat this. This is a clear indication of an acceleration in a contracting demand for labor that must be nipped in the bud. That, unfortunately, requires waking that sleepy crew at the FOMC and lighting a fire under their collective tails. As a group composed mostly of academics, a fiery work ethic is probably not its aggregate specialty.

The average workweek, which is also a measure of labor market demand, printed at 34.3 hours, up from 34.2. While I would like to celebrate that stat, it only includes full-time workers and excludes those downgraded to part-time. Hence, this metric is currently meaningless.

Wage growth disappointed as well. Average hourly earnings printed flat from July at year-over-year growth of just 3.5%. That was down from growth of 3.7% in October and 3.8% for September.

Demographics 

The unemployment rate along gender, ethnic background and education (reminder, The rates are from September to November):

• Adult Men increased from 4.0% to 4.1%
• Adult Women decreased from 4.2% to 4.1%
• Teenagers increased sharply from 13.2% to 16.3%

•  White increased from 3.8% to 3.9%
• Black or African American increased sharply from 7.5% to 8.3%
• Asian decreased sharply from 4.4% to 3.6%
• Hispanic or Latino decreased sharply from 5.5% to 5.0%

• High School Dropouts held steady at 6.8%
• High School Graduates increased from 4.2% to 4.4%
• Some College/Associate Degrees increased from 3.4% to 3.5%
• Bachelor's Degrees and more increased from 2.8% to 2.9%

Retail Sales

For the month of October, retail sales printed flat from September, falling short of expectations for growth of 0.1% and decelerating from September's month-over-month growth of 0.2%. Interestingly, it was auto sales that really did this report some harm. 

Sales of motor vehicles and auto parts were down 1.6% in October from the month prior. That meant that core retail sales (which excludes autos) printed at monthly growth of 0.4%, up from September's 0.3% print and far better than expectations. Guess that's why you and I have seen all of these year-end 0% financing offers from so many auto sellers.

The sale of building materials was down 0.9% month over month as well. That's two pretty important business types moving in the wrong direction and doing that at fairly nasty clip at that. So, what was hot in October? Furniture sold well that month, sporting growth of 2.3%, while the "fun Index" showed growth of 1.9%. The fun index for my newer readers is the component of retail sales labeled "Sporting Goods, Hobbies, Music and Books." I call it the fun index because everything in it is purely discretionary.

What it says usually when the fun index is doing well is that folks have some dough to spend. What it means when demand for labor is ebbing, and folks have stopped spending on autos and fixing up their homes, I can't say. Health and personal care sales were negative as well. We are going to have to wait on holiday season results that will at least be partially included in the November release to get a better picture of consumer health.

Market and Policy

Markets have not really reacted well to this data at all. There was an initial rally across equities that faded quickly and then turned into a sell-off. According to futures markets, there remains just a 24% probability for a 25 basis-point rate cut on January 28. There is now a 75% likelihood for a total of 50 basis points worth of rate cuts for all of 2026, up from 70%. The U.S. 10-year note still pays about 4.17%, which is roughly where that yield has been for almost two weeks.

Does it make sense to me? Not really. Markets are acting as if today's macroeconomic data will not move the Fed's needle as far as getting more dovish is concerned. I think it most certainly should. 

As far as the FOMC is concerned, Musalem of St. Louis and Schmid of KC will lose voting rights in 2026 along with Collins of Boston and Goolsbee of Chicago. I see Musalem and Schmid as hawkish, Collins as pragmatic and Goolsbee as slightly dovish in nature.

Gaining voting rights in 2026 will be Hammack of Cleveland, Paulson of Philadelphia, Logan of Dallas and Kashkari of Minneapolis. Logan is pragmatic. That's a trade-off for Collins. Hammack is a perma-hawk. That's a trade-off for Schmid. Kashkari leans dovish. He trades off for Goolsbee. That leaves Paulson. I don't really have a good read on her yet. If she is less hawkish than Musalem, the doves will make a small gain in the FOMC that will be exacerbated once Powell is relieved as chair by either Marsh or Hassett.

My Secret Fear Going Forward

This won't be so secret going forward. What if, through lower taxes, deregulation and a sharp increase in productivity generated through the implementation of generative and agentic artificial intelligence, the seasonally adjusted annual rate of GDP growth can sustainably move above 3% or even 3.5%? That would be great, right?

What if AI ends up being as deflationary as the internet was, or even more so? Also great, right? OK. 

What if in this disinflationary, highly productive environment, demand for labor continues to ebb, even with what look like traditionally strong GDP numbers? Possible. More than possible. 

How does the central bank provoke full employment in an environment where economic activity is strong at many levels, but employment is not? 

Now you know what keeps me up at night. Rage against the machines? More likely just stay invested.

At the time of publication, Guilfoyle had no positions in any securities mentioned.