Investors Need a Playbook for the Next Shutdown

Jeffrey Roach (00:08):

I am Jeffrey Roach, Chief Economist for LPL Financial with three talking points for the current macro landscape. First, investors need a playbook for the next shutdown. Now, I think it's too early to say if Congress will fail to pass a funding bill, but nevertheless, it behooves investors to develop a plan for what to look at when government employees are out of office, and we don't get official metrics on the economy. First and foremost, your analytics toolkit should include labor data such as ADP's employment report, conference boards, job data, and labor market insights from the NFIB. So the current short-term funding measure expires on January 30th, 2026, which is the next possible date for a U.S. federal government shutdown unless Congress passes another continuing resolution. Second, productivity growth is the special elixir. After the Federal Open Market Committee voted to lower the Fed funds rate to a target range of 3.5% to 3.75%, and there's no surprises here, by the way.

Jeffrey Roach (01:11):

But what's noteworthy is compared to the previous edition, the current summary of economic projections has higher growth expectations along with lower inflation. Further, fed officials are suggesting that we could get higher growth without more job creation. So what's the specialty elixir that can give us that scenario? Stronger productivity. Right now it looks like the economy is set up for a positive productivity shock in the coming years, and this will become a major theme as businesses assess how they're positioned in the marketplace and how efficiently they're using AI tools to enhance productivity. Third, expect rising unemployment In the new year. November, unemployment rate rose to 4.6%, not just from a spike in those laid off, but likely from a spike in those reentering the labor force and this chart here is showing you the number of individuals previously not counted in the labor force. That's because they're not looking for work, and now these individuals are starting to look for a job.

Jeffrey Roach (02:16):

I believe we could see a further rise in unemployment as more people come off the sidelines and renew their search for employment. Now, taking a step back here, let's look at a few highlights from the latest job figures and what it means for interest rate policy. Payrolls grew by 64,000 in November after shrinking over a hundred thousand in October, and that was driven by the decline in federal payrolls, excluding the postal service. November average hourly earnings rose only 0.1% month over month, and that pulled down the annual rate to 3.5%, and that's the lowest annual pay since 2021. This deceleration in wage growth may turn out to be a big story for the job market in the coming months. Bottom line is this. The job market is undergoing a transformation. Wages are slowing and will make consumer income a more dominant theme in the new year. Further, a rotation in labor supply will also be a theme. As we see more individuals formally not in the labor force begin their job search, the Fed will continue to focus on the fragilities in the labor market to justify further cuts in 2026. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.