As we get into the full swing of 2026 and the government gets caught up with their numbers, we continue to get a better idea of where the economy is heading.
Now keep in mind, and I’ve said this before, that I expect the economy to slow and unemployment to head toward 5%. That should put some pressure on interest rates and allow them to come back down.
The nonfarm payroll report shows a 50,000 gain in December, as opposed to estimates of 73,000. In addition to missing the payroll number, the previous two months were revised lower. October was revised down from an earlier revised number of -105,000 to -173,000, while November was revised down from 64,000 to 56,000. Overall, not a great report…but wait a minute.
The unemployment rate ticked down from 4.5% in November to 4.4% in December. That is up from 4.1% in December of 2024. So not terrible and not an economy that is falling apart. An economy that is slowing gently.
So, from an employment perspective the economy is slowing, but we talked to you about the GDP print from Q3 that came in at 4.3%, while the Atlanta FED’s GDPNow forecast was saying 3% growth for Q4. Look at what they are saying now!
YOU’VE GOT TO BE KIDDING ME! Over 5%. Meanwhile the “Blue Chip Economists” are still forecasting less than 1%. Somebody is going to be wrong. The Atlanta FED aggregates all data as it is released into their number. So far things look pretty good.
But what I said December 29th was that we have to wait for productivity numbers to see what the likelihood of inflation is down the road. Less employees with more productivity is a good scenario for the markets. The productivity number was just released Thursday, and it showed a 4.9% growth in Q3. Here’s the excerpt from the BLS (Bureau of Labor Statistics).
5.4% more productivity with only 0.5% more hours worked! Now that’s not good for people looking for a job, but it is good for profitability. And it happens to be very good for inflation.
In fact, Truflation is showing a steep decline from December, to fall back to sub 2% inflation. 1.9% to be exact.
There is still much fear around tariffs, but those don’t seem to be adding much to inflation at the moment. But what it is helping is our balance of trade (which was just released).
It was the lowest deficit since 2009, but for very different reasons. Back in 2009, we weren’t buying much because we were just coming out of the GFC. Now we are buying more goods made in the US and less overseas.
All these things can change in a heartbeat, but for now they all look pretty good. Our model is starting to sniff out a change, but it’s early and things can get back on track from a model perspective.
That’s it for this week. Please let us know if you have any questions or comments about this or any other topic. We will certainly be happy to have a conversation.