Surprise unemployment rate drop in December likely throws cold water on Fed rate cut

Executive summary

U.S. payrolls added 50,000 in December but downward revisions sliced a combined 76,000 from the November and October tallies. That dragged the six-month average down to just 14,500, and the full-year 2025 sum down to an equally underwhelming 584,000, or 48,700 per month.

Alas, the internal trends remain sloppy. To wit, the unemployment rate dropped to 4.4%, but just 4 of the 11 major industry groups hired in December. Meanwhile, wage growth improved, but hours worked and the participation rate declined.

While the government shutdown distortions are still cycling through the economic data, the underlying resilience of the U.S. economy remains apparent to us, which has repeatedly surprised to the upside in recent months. In our view, this report effectively undercuts the main argument for a rate cut – that the labor market is weakening – at the January 28^th meeting of the Federal Reserve (Fed). Of course, there’s some important upcoming data before policymakers make that call, including multiple inflation readings. 

Payroll trends – Sloppy 6-month trend continued

The economy added 584,000 for all of 2025, though federal layoffs were a consistent drag, cutting 274,000 positions. Excluding those, private payrolls increased by 803,000 in 2025. The total U.S. nonfarm payrolls are at 159.5 million, hovering near the all-time high.

Service-providing industries hired 58,000 workers in December, while goods producers shed 21,000.

Government payrolls added 13,000 workers in December, which were largely local non-educational positions. States cut 7,000 positions. But federal payrolls hired in back-to-back months for the first time in nearly a year – adding 2,000 and 3,000 in December and November, respectively. As we’ve been noting here, job losses from the Department of Government Efficiency (DOGE) initiative are now in the rear-view mirror.

Policy influence vs. policy action

A Fed Chair can influence the direction of policy through speeches, testimony, and agenda-setting. But influence is not the same as control. Even if a new Chair were to advocate for aggressive rate cuts, they would need to build consensus among the other voting members—many of whom are deeply concerned about inflation risks and the credibility of the Fed’s inflation-fighting mandate.

Moreover, the Fed’s dual mandate—to promote maximum employment and stable prices—requires balancing competing risks. With inflation still above target and the labor market showing resilience, the case for immediate, large-scale rate cuts is weak.

A review of the major industry trends

Six of the 11 major industry groups reduced payrolls in December. Job growth was led by leisure and hospitality for the first time in three years. Nearly 60% were within food service, which added 27,600 jobs during the month, while arts & entertainment segments rebounded to hire 17,000 workers after job losses in the past two months.

The education/health services industry group added the second most in December, nearly 95% were within health care, which remains the U.S. economy’s proverbial bell cow. Private education services added 2,000 jobs during the month.

The financial activities segment hired 7,000, matching its highest total in 10 months. Almost all were within real estate-related categories.

Conversely, retail trade cut 25,000 jobs. Most were at general merchandise stores, which fell for the third straight month for a combined 47,000 over that span.

Construction swung to job losses, continuing a trend of alternating gains and losses during the past six months, but the payrolls were flat during that stretch. Once again, most of the losses were at commercial specialty contractors (aka nonresidential).

Professional & business services remain hamstrung by reductions within temporary help, which cut 5,700 jobs in December. That extends an ugly streak of job losses in 42 out of the past 45 months, resulting in 723,500 fewer positions.Market expectations — A reality check

Unemployment rate down, but so were hours worked

The unemployment rate fell to 4.4% but remains above the pre-pandemic 3-year average of 4.0%. However, it remains low compared to the historical average of 5.7% since 1948.

The broader underemployment rate (U-6) also declined, dropping to 8.4% from 8.7% in November. Still, it’s above the pre-pandemic 3-year average of 7.8%. The labor force participation rate dipped to 62.4% after three months at 62.5%. It remains 0.9% below the pre-pandemic rate of 63.3%.

Average weekly hours worked fell by 0.1 to 34.2, which is below the pre-pandemic average of 34.4. Within manufacturing, hours worked fell by 0.2 to 39.9, while overtime hours were unchanged at 2.9 for the fifth month in a row.

Average hourly earnings rose by 0.3% month over month, bringing it back in-line with the pre-COVID three-year average. Annual wage growth was 3.8% for all workers, which remains above the pre-pandemic average of 3.0%.

But wages for rank & file workers—officially known as production & nonsupervisory employees—only edged up 0.1% in December, cooling the annual average to 3.6%, although that remains above the pre-pandemic average of 3.0%. 

Our Take

The trend remains sloppy as job growth has been erratic, oscillating between job gains and losses during the past six months. Tariffs and DOGE disrupted hiring during the spring and summer, followed by the government shutdown delivering another blow in the fall. To make matters worse, the shutdown meant no surveys were conducted by the Bureau of Labor Statistics (BLS). For instance, household survey data – which we use as a double-check against the establishment survey – were not collected for October, and in turn resulted in no data for the quarter. Alas, we reiterate our warning that we won’t get a clean read on the economy for another month or so.

Nonetheless, the December jobs report was mixed. On the positive side: the improvement in the unemployment rate and wage growth. Yet, overall job growth was lackluster and remains concentrated in a handful of industries. Hours worked and the labor participation rate both declined.

Aside from this report, much of the economic data – from retail sales and travel traffic to weekly jobless claims – remain resilient with the obvious exceptions of housing and manufacturing. Moreover, inflation readings have cooperated, thanks in part to lower gasoline prices.

Thus, we’d like a few more months of data to confirm our hypothesis that the recent labor market weakness was related to the government shutdown and, therefore, temporary. This would lead us to expect patience rather than urgency in the near term by Fed policymakers, particularly after having cut at the past three meetings. Hence, we think the Fed will punt at the January 28^th meeting. 

Bottom Line

The labor market trend has remained sloppy over the past six months, disrupted by tariffs, DOGE, and the government shutdown, which delayed key economic data. While December’s jobs report was mixed, broader economic indicators remain resilient, and inflation has largely remained well behaved. Thus, we expect the Fed to hold steady at the January 28^th meeting as policymakers await more data to confirm that recent labor softness is temporary.