On November 8th, the US federal government shutdown entered its 39th day, becoming one of the longest government shutdowns in history. This shutdown stemmed from Congress's failure to pass a spending bill for fiscal year 2026, forcing key federal agencies, including the Bureau of Labor Statistics (BLS), to suspend some operations. The official October jobs report, originally scheduled for release on November 7th, was thus delayed, disrupting the key economic data chain and exacerbating market concerns about the health of the labor market. In the absence of official data, private sector reports have become the primary tool for assessing the pulse of the US economy. However, these private reports reveal a rather contradictory picture: on the one hand, the labor market shows signs of weakness, with layoffs surging; on the other hand, private employment data unexpectedly rebounded. This mixed signal has not significantly changed market expectations for the Federal Reserve's December meeting. According to the CME FedWatch tool, as of November 6, the probability of the Federal Reserve cutting interest rates by 25 basis points at its December 10 meeting was approximately 58.3%, a slight decrease from 63.8% a week earlier, reflecting investor uncertainty about the policy path. This puts the Fed's dual mandate—maximum employment and price stability—under severe scrutiny. The current target range for the federal funds rate is 3.75% to 4.00%. The Fed has already cut rates by 25 basis points twice in September and October to address the slowing labor market. However, inflation remains around 3.0%, well above the long-term target of 2%, and faces upside risks due to tariff policies and supply disruptions. At a press conference on October 29, Fed Chairman Powell emphasized that policymaking will be "data-dependent," comparing the economic situation to "driving in fog": the government shutdown leading to data gaps may prompt the Fed to adopt a more cautious stance. He pointed out that labor market risks are tilted to the downside, while inflation risks are tilted to the upside, and this tension requires the Federal Reserve to seek a balance between its dual mandates. The economic impact of the government shutdown: data vacuum and uncertainty. The US government shutdown, which began on October 1st, has lasted for over a month and has had a wide-ranging impact. According to estimates from the Congressional Budget Office (CBO), such a shutdown could result in an annual GDP loss of 0.1% to 0.5% and amplify economic uncertainty. This shutdown stems from partisan disagreements on border security and immigration reform. Democrats accuse Republicans of using the shutdown as a political bargaining chip, while the White House emphasizes that Democrats refuse to compromise. The shutdown has forced approximately 800,000 federal employees to take leave or work without pay, with Department of Defense civilian employees and Department of Homeland Security personnel bearing the brunt. Meanwhile, social welfare programs such as the Supplemental Nutrition Assistance Program (SNAP) and the Women, Infants, and Children Nutrition Program (WIC) face funding shortages, and some beneficiaries may receive only half their allowance in November. For the labor market, the direct consequence of the shutdown is the disruption of official data. Key indicators such as the BLS Employment Situation Report, the Consumer Price Index (CPI), and the Producer Price Index (PPI) are all hampered. Although the October CPI data was barely released before the shutdown, showing an annualized inflation rate of 3.0%, a slight increase from 2.9% in August, mainly driven by a 4.1% rise in gasoline prices, the core CPI (excluding food and energy) remained stable at 3.0%. However, with more than two-thirds of the data collection interrupted in November, the next inflation report may be delayed or incomplete. Federal Reserve officials acknowledge that this "data black hole" increases policy difficulties. Chicago Federal Reserve President Austin Goolsby stated on November 3rd that the shutdown was "like walking in the fog" and could lead the Fed to "slow down" at its December meeting. The government shutdown is not only a symbol of fiscal failure but also exposes the fragile reliance of the US economy on reliable data. In a globalized world, data disruptions can amplify market panic, leading to a freeze in corporate hiring and a contraction in consumer spending. In the long run, this serves as a reminder to Congress to reform the budget process to prevent political gridlock from impacting the economic fundamentals. However, in the short term, it reinforces the importance of private data, pushing markets towards alternative indicators such as the ADP and Challenger reports. While this shift is practical, it also introduces biases: private data has limited coverage and cannot capture the dynamics of government employees. Challenger Report: October Layoffs Surge to 22-Year High Amid a lack of official data, the monthly job cuts report released by employment consulting firm Challenger, Gray & Christmas has become a focal point. The report tracks publicly announced layoff plans by companies. October data shows that U.S. employers announced 153,074 job cuts, a 183% surge from 54,064 in September and a 175% increase compared to October 2024. This is the highest monthly level since October 2003 (171,874), bringing the total number of layoffs this year to 1,099,500, a 65% increase compared to the same period in 2024, exceeding 44% of the total for the entire year of 2024. The surge in layoffs is due to multiple factors: cost-cutting was the primary driver (highest in October), followed by the adoption of artificial intelligence (AI), market economic conditions, and restructuring. The report specifically points out that the "DOGE impact" (referring to federal layoffs and contractor reductions driven by the Department of Government Efficiency (DOGE)) is the leading driver for the entire year of 2025, but AI jumped to second place in October, resulting in a cumulative loss of 48,414 jobs. The warehousing industry led the decline, with 47,878 layoffs in October, bringing the year-to-date total to 90,418, a 378% year-on-year surge; the technology industry jumped from 5,639 in September to 33,281, a significant year-on-year increase; the services industry saw 63,580 layoffs (a 62% year-on-year increase); the retail industry saw a year-to-date total of 88,664 layoffs (a 145% year-on-year increase); and consumer goods companies saw 41,330 layoffs (a 21% year-on-year increase). It's worth noting that 450 companies announced layoffs in October, up from less than 400 in September, indicating weak business confidence. Furthermore, the report shows that layoffs are traditionally lower in the fourth quarter (due to Thanksgiving and the Christmas season), but October's unusually high figure suggests that economic pressures have exceeded seasonal norms. Challenger's Chief Revenue Officer, Andy Charlinger, commented, "Similar to 2003, disruptive technologies are reshaping the landscape, and the correction of the post-pandemic hiring boom is compounded by AI and cost pressures." It should be noted that while Challenger data is highly volatile (tracking only public announcements), its trend signals cannot be ignored. AI-driven layoffs reflect a structural shift: tech giants like Amazon and Microsoft have cumulatively laid off tens of thousands to optimize efficiency, but this has exacerbated the risk of skills mismatch, making it more difficult for low-skilled workers to re-enter the workforce. The surge in warehousing and retail sales points to weak consumption, with inventory buildup, impacted by high interest rates and tariffs, forcing businesses to downsize. Overall, the report paints a less-than-ideal picture: the labor market has shifted from net monthly increases of over 100,000 in earlier years to layoffs dominating, signaling a potential recession. If the shutdown continues, layoffs by federal contractors could further amplify the effect, testing the Federal Reserve's primary mandate to create jobs. In contrast to Challenger's pessimism, the ADP National Employment Report shows a net increase of 42,000 private sector jobs in October, reversing the losses of -29,000 in September and -32,000 in August (revised). This figure exceeded analysts' expectations of 32,000, marking the first positive growth since July. ADP Chief Economist Nera Richardson noted, "Employers added jobs in October for the first time since July, but the scale of hiring was more modest than earlier this year. Wage growth has been flat for over a year, indicating a balance between supply and demand." Industry breakdown shows that trade, transportation, and utilities added 47,000 jobs, and education and healthcare added 26,000, offsetting losses of 17,000 in information technology and 15,000 in professional/business services. Large enterprises (500+ employees) contributed 73,000 of the increase, while small and medium-sized enterprises were net negative. The median annualized wage rose 4.5%, and the job-hopping rate reached 6.7%. ADP covers 26 million private sector employees, and its data is based on anonymous pay stubs, making it more timely than official data. However, ADP data often deviates from BLS data and is susceptible to seasonal adjustments. The September ADP report predicted a net loss, but the actual rebound showed hiring resilience. Growth in transportation and trade was partly due to pre-holiday stockpiling, but the disruption to federal spending caused by the shutdowns may become apparent in November. It should be noted that the positive signals from ADP provide a respite but cannot mask the overall weakness. Net monthly increases of over 100,000 in early 2025 have now fallen to tens of thousands, and combined with the wave of layoffs at Challenger, this indicates a "two-speed divergence" in the labor market: blue-collar service sectors are barely holding on, while white-collar technology and service sectors are under pressure. The ADP rebound may be temporary, and if consumption cools further (dragged down by 3% inflation and high savings rates), the November data could reverse. This reinforces the necessity of Powell's "data dependence": a single report is insufficient to set the tone; multi-source verification is necessary. The Fed's Dual Mandate: The Dilemma of Balancing Employment and Inflation The Fed's dual mandate stems from the 1977 amendments to the Federal Reserve Act, which mandated the promotion of "maximum employment, price stability, and moderately long-term interest rates." The 2% inflation target was established in 2012, while maximum employment has no fixed threshold and is influenced by non-monetary factors (such as demographics and technological change). The 2025 framework review emphasizes that in non-linear environments (such as supply constraints), employment shortage strategies could trigger a surge in inflation. Currently, the unemployment rate is stable at around 4.1% (September data), but the unemployment rate among Black people is rising, indicating an imbalance. The annual inflation rate is 3.0%, and the core PCE is 2.8%, affected by tariffs (expected to push it up by 0.8% in early 2026) and energy fluctuations. The September Summary of Economic Projections (SEP) shows that the median FOMC member forecasts an interest rate of 3.9% by the end of 2025, but the scatter plot shows significant divergence: some forecasts only one cut, while others predict three. Although the SEP indicated a December rate cut, the government shutdown changed the situation, and private data delivered mixed signals without a clear direction. Internal disagreements within the Federal Reserve are becoming increasingly apparent. Federal Reserve Governor Lisa Cook stated on November 3 that the risks to the labor market "outweigh the potential for accelerating inflation," urging a focus on employment and supporting further interest rate cuts to prevent a sharp deterioration. She also noted that past experience shows the labor market can deteriorate rapidly. In contrast, Goolsby views inflation as a primary warning sign, cautioning that market expectations embedded with tariff effects could become a self-fulfilling prophecy. In March, Goolsby stated that inflation had exceeded the target for four and a half years and was heading in the wrong direction. In his October press conference, Powell acknowledged that committee members were deeply divided on the December path, with some concerned about declining employment and others alarmed by rising inflation. The path is not predetermined but based on the outlook and a balance of risks. Cook's employment-first approach reflects the "shortfalls approach," stemming from the 2020 framework and aiming for inclusive growth; Goolsby's inflation hawkish stance draws lessons from the Great Stagflation of the 1970s. While Powell's "neutral" response was prudent, it exposed challenges to the Fed's independence: Trump's tariff policies could push up inflation by 0.07% to 0.8%, forcing the Fed to "proactively" address the issue. Lowering interest rates could boost employment but fuel inflation, while maintaining high interest rates could suppress inflation but harm growth. Under the current circumstances, the Fed should strengthen communication and release scenario analyses to manage expectations. In the long run, a single inflation mandate might be more efficient (like the European Central Bank), but a dual mandate is more in line with the US's inclusive goals. Currently, the government shutdown has amplified uncertainty, and the Fed may need to gradually lower interest rates: if it cuts in December, the magnitude should be limited; if it remains unchanged, it signals an inflation warning. Market Expectations and Potential Scenario: A Look Ahead to the December Meeting The CMEFedWatch tool, based on federal funds futures pricing, showed on November 6th that the probability of a December target rate of 3.50%–3.75% was 58.3%, and the probability of no change (3.75%–4.00%) was 41.7%, compared to 63.8% a week earlier. A mixed Challenger/ADP signal led to a slight pullback. Following Powell's press conference, the 10-year Treasury yield rose to 4.05%, the dollar index reached 99.10, and the stock market turned negative, reflecting concerns about an "unsecured rate cut." While market expectations are becoming more rational, the risks of a prolonged government shutdown are easily underestimated. If the shutdown extends to Thanksgiving, the disruption of the Social Security Program (SNAP) could lead to a sharp drop in consumption, amplifying the decline in employment. The Federal Reserve should learn from the 2013 shutdown experience and utilize high-frequency data (such as credit card spending) to fill the gap. From an investor's perspective, a December rate cut remains the benchmark, but volatility is high. Overall, the labor market is expected to shift from boom to correction by 2025, requiring the Fed to exercise caution in the fog and balance its dual mandate to avoid a hard landing. The US labor market is showing cracks under the shadow of the government shutdown: the wave of layoffs revealed by Challenger intertwines with the hiring highlights shown by ADP, highlighting the structural challenges of Fed policy. The Federal Reserve faces a classic dilemma—a race between a soft landing for employment and eliminating inflation. While Powell's neutral stance has stabilized the market, it cannot mask the structural divergence in policy direction. The upcoming December meeting may be a turning point: interest rate cuts could buffer employment risks, but a rebound in inflation would test the Fed's credibility. Currently, the situation facing the US authorities reveals the fragility of its system. In any case, political gridlock should not sacrifice the timeliness and transparency of economic data. Looking ahead, ending the government shutdown and resolving tariff uncertainty will be crucial.
Alex
Jasper
YouQuan
Jixu
Kikyo
Hui Xin
Catherine
Clement