By the end of 2025, the United States economy was healthy with strong economic growth. The labor market flashed multiple red flags. Of note, with GDP growth well above 3% in the second half of the year, this points to strong economic activity. This good news is a world apart from the accelerating unemployment rate. It shot up to 4.6%, hitting a four-year peak. These unusual mixed signals from the labor market have led to confusion and concern among economists and policymakers across the board.
By the way, according to the latest advance reports, US retail sales surged 0.8% m/m in November. This robust growth in core retail sales is a positive signal of consumer resilience and spending confidence, even amid turbulent economic headwinds. Most retail sectors have seen positive effects from seasonal shopping trends, usually improving sales and making this time of year rosy on paper.
Where retail sales presented a rosy picture, the employment report showed a more complicated set of realities. Unemployment shot up to 4.6%, evidence of both the difficulty in creating jobs and the participation of our workforce. The full report is due January 9, 2026. In particular, it will attempt to lay out a clear picture of employment trends across the country and how that might inform potential moves toward tightening monetary policy.
US inflation rates fell sharply in November. The annual inflation rate dropped to 2.6%, down from 3.0% in September. This decline will help relieve some pressure on the Federal Reserve as it tries to grapple with appropriate monetary policy in a time of mixed economic signals.
Consumer price inflation is giving budding signs of encouragement. Given the rapidly changing employment picture, the question remains: how can this growth be maintained? Still, economists warn that even as falling inflation helps fuel consumer spending, an increasing unemployment rate will likely put a damper on economic confidence in general.
US Treasury yields fell modestly on the week. This change captures the rapid shift in investor sentiment as the economic story has played out with a real push and pull. Now investors are getting spooked. They are balancing growth prospects against fragility in the labor market, which likely accounts for at least part of the decline in yields.
The new employment report on January 9 should help sharpen these trends even more. Analysts will keenly watch for indicators of a turnaround, or continued difficulty, in the pace of job creation. These insights have the potential to drastically improve the return on taxpayer investments and increase market performance.