As the year draws to a close, investors are left squinting through a familiar seasonal haze. Holiday timing effects, delayed releases from the government shutdown and one-off distortions have turned recent economic data into something of a snow globe, busy, noisy and misleading if shaken too hard. Still, once the flakes settle, the broader macro picture looks far more stable than the headlines suggest.

This is not an economy accelerating into overheating, nor one slipping quietly into recession. It is, instead, an economy decelerating gracefully, uneven in places, resilient in aggregate and increasingly shaped by distributional effects rather than broad-based weakness.

Executive Summary

• The data fog is real, but the underlying signal is intact. Shutdown-related distortions and seasonal effects are complicating interpretation of labor and inflation data, making trend analysis more important than month-to-month moves.
• The labor market is cooling, not cracking. Hiring has slowed and unemployment has edged higher, but layoffs remain limited and private-sector job growth continues.
• Consumers remain resilient, if unevenly so. Sentiment is weak, particularly among lower-income households, yet aggregate spending remains supported by wealthier consumers.
• Inflation is easing, but measurement issues will linger. Shelter-related distortions are likely to cloud Consumer Price Index (CPI) readings well into 2026.
• The Federal Reserve is in no hurry. With inflation noisy and labor markets broadly intact, patience, not urgency, is likely to define Fed policy…. But as we discussed last week, how much does it really even matter?
• Housing and inventories are soft spots, not fault lines. Both appear closer to stabilization than deterioration as we head into the new year.

Labor Markets: Cooling Air, Solid Ground

Recent labor market data show payroll growth moderating and the unemployment rate rising to 4.6% in November, slightly above the Federal Reserve’s own year-end projection. Importantly, the increase was driven largely by labor force growth and temporary layoffs, rather than a surge in permanent job losses, which actually declined in November.

Private-sector payrolls expanded by an average of 75,000 jobs over the past three months, well above estimated break-even levels, although policymakers acknowledge these figures may be overstated due to residual measurement issues following the government shutdown. Initial jobless claims remain consistent with stable labor market conditions, despite elevated seasonal volatility.

• Key takeaway: The labor market is slowing in an orderly way, more consistent with late-cycle cooling than recessionary stress.

Inflation: A Silent Night…With Footnotes

Headline and core CPI inflation were running at 2.7% and 2.6% year-over-year in November, respectively, below earlier expectations. However, interpretation is complicated by shutdown-related distortions that artificially suppressed shelter inflation, which accounts for more than 40% of core CPI.

Because October rent data were carried forward due to missing surveys, shelter inflation is likely to remain artificially depressed until April 2026, when the distorted observations should rotate out of the CPI calculation. As a result, economists recommend focusing on core CPI excluding shelter for a cleaner read on underlying inflation trends. Encouragingly, long-run inflation expectations fell to 3.2% in December, the lowest level since January, suggesting confidence that inflation has passed its peak.

• Key takeaway: Inflation pressures are easing, but near-term CPI prints are likely to remain unreliable guides.

The Consumer: Feeling Frosty, Spending Anyway

Consumer sentiment remains deeply depressed, with the University of Michigan index 29% lower than a year ago, as households continue to worry about prices and labor market conditions. Consumers also rate current conditions as the worst time to buy durable goods in over 40 years.

Despite this pessimism, underlying retail sales continue to grow. Excluding autos, real consumption is tracking close to 2% annualized growth in Q4, supported by strong non-store sales and resilient discretionary spending. Older, wealthier households, who account for roughly 40% of total consumer spending, continue to benefit from a strong equity market, driving a widening gap between sentiment and spending behavior.

• Key takeaway: Consumer psychology is weak, but consumer balance sheets (at least at the top) remain supportive.

Housing and Inventories: Frozen, Not Broken

The housing market remains subdued, but several indicators suggest stabilization. Existing home sales rose for a third consecutive month in November, supported by lower mortgage rates and a firmer labor market outlook.

Homebuilder sentiment remains below expansionary levels, but builders’ expectations for home sales six months ahead rose into positive territory, supporting forecasts for a gradual increase in housing starts in 2026.

Builders continue to rely heavily on incentives, with 67% offering some form of sales incentive in December, reflecting ongoing efforts to clear elevated inventories of completed homes. On the business side, inventories were a modest drag on Q3 GDP, but lean customer stockpiles and easing commercial lending standards suggest conditions may improve in 2026.

• Key takeaway: Housing and inventories remain soft, but the trajectory is stabilizing, not deteriorating.

The Fed: Calm, Collected and in No Rush

Taken together, recent data may validate the Fed’s 75 basis points of rate cuts in late 2025, but do not seem to justify additional near-term easing. With inflation data distorted and labor markets holding up, Fed officials have signaled little urgency to cut rates further, with baseline expectations centered on mid-2026 for the next move.

Wage growth reinforces this stance. Average hourly earnings rose just 3.5% year-over-year in November, a pace consistent with the Fed’s inflation target and not indicative of renewed price pressure.

• Key takeaway: Monetary policy has shifted from driver to backdrop, supportive, but deliberately inactive.

Conclusion: Durability Over Drama…Despite the Headlines

As the year draws to a close, the macro narrative is less dramatic than many feared and seemingly more durable than many expected. Growth is slowing but steady. Inflation is cooling but uneven. Labor markets are softening but functional. Consumers are anxious but spending. And policymakers are patient.

In other words, this economy is not racing into the new year but rather pacing itself. And after a volatile 2025, the most valuable gift may not be acceleration or stimulus but staying power.

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