Mark Vitner

A Two-Speed Expansion Enters a Cooling Phase

Financial markets ended the week with a calm that felt slightly at odds with the underlying economic tone. Equity indices hovered near all-time highs, volatility receded, and modestly stronger data from Europe and China offered reassurance that the global soft landing remains intact. Yet beneath the surface, the internal gears of the U.S. economy are turning more slowly. The labor market is softening more sharply and more broadly, the services sector is shedding some of its earlier momentum, and manufacturing remains modestly but firmly in contraction. Stability persists, but with diminishing buffers and a steeper glide path than markets appreciated a few weeks ago.

The soft landing remains alive, but the labor market is cooling in breadth, not just in pockets.

The two-speed economy is now unmistakable. Services remain the dominant engine of the post-pandemic period and continued to expand. The ISM Services PMI rose to 52.6 in November. Business Activity held at 54.5, and backlogs surged to their highest level since early 2025. These indicators collectively point to an economy growing at roughly a 1.3% annualized pace. Yet the deeper trend is drifting downward: the 12-month average of the Services PMI sits at its lowest reading since 2010, evidence of a maturing cycle rather than an accelerating one.

The ISM Survey is consistent with our key call for 2026, which sees the economy getting off to a sluggish start in the New Year but catching its second wind by mid-year.

Manufacturing, meanwhile, is charting a different trajectory. The ISM Manufacturing PMI contracted for the ninth consecutive month, slipping to 48.2, with new orders, backlogs, and export demand all under pressure. Producers are not signaling collapse, but rather caution—rooted in tariff volatility, compliance frictions, and lingering effects of the government shutdown. Customer inventories remain unusually lean, a condition that typically precedes a restocking cycle. But managers remain hesitant, preferring liquidity and flexibility over scale until policy uncertainty clears.

Weakness that began in goods production is now visible across the labor landscape.

The labor market delivered the most consequential signals of the week. ADP reported a 32,000 decline in private payrolls; Challenger layoffs softened slightly from October’s spike but remain 24% above year-ago levels; and both ISM employment readings remained in contraction—Services at 48.9, Manufacturing at 44.0. Until recently, hiring weakness had been concentrated in rate-sensitive pockets of the economy. Now it is broadening across middle-skill service industries and goods-producing sectors. With the federal shutdown delaying fresh BLS payroll and CPI releases, the Fed must rely more heavily on these forward-looking indicators, which carry decisive weight heading into the December FOMC meeting.

A Hawkish Cut Comes into View

The policy implications are significant. The Fed is almost certain to cut rates this week, but the broader narrative remains unsettled. The dove bloc argues that risks to employment now outweigh risks of lingering inflation and that tariffs represent a one-time shift in price levels rather than a persistent inflationary force. Centrists emphasize careful progress toward the neutral rate. The hawks warn that financial conditions have eased too quickly and that another cut risks weakening the Fed’s credibility. Powell’s challenge is to deliver an easing step that arrests the downward drift in the labor market without signaling a broad pivot.

The Fed must cut to steady hiring but must do so without undermining inflation credibility.

What the market increasingly anticipates is a hawkish cut: one that acknowledges the labor softening while clearly conveying that the Committee is not embarking on a rapid or extended easing cycle.

From a financial management standpoint, this environment requires a more tactical interpretation of the yield curve. The front end remains anchored to the near-certain December cut, but expectations for additional easing have thinned. The long end continues to face upward pressure from Japanese yield dynamics and heavy Treasury issuance. Funding markets remain stable, with abundant liquidity, and tight credit spreads—but duration volatility is still elevated.

This is a moment to preserve optionality: maintain staggered maturity ladders, extend duration opportunistically, and consider timely pre-funding of 2026 obligations. The December cut should be viewed as a calibration of policy, not the beginning of a deeper easing sequence.

Global Dispersion and the Strategic Backdrop

Globally, monetary dispersion has returned. Japan’s upward pressure on yields remains a key undercurrent in global fixed income. Switzerland has not ruled out unconventional measures if the franc strengthens excessively. Australia, Brazil, Canada, and Türkiye all continue to move in divergent directions. The post-tightening era is not synchronized easing but a landscape of increasingly differentiated monetary paths and heightened FX sensitivity.

Geopolitically, the global map remains tense but contained. Ukraine enters winter under considerable strain as Russia employs more sophisticated drone and artillery tactics. The Gaza ceasefire remains fragile but holds for now, with particularly intense fighting around tunnel networks. PLA air and naval activity around Taiwan remains elevated, reinforcing long-term strategic risk in the Indo-Pacific. Markets have absorbed these developments with guarded calm, but that calm depends heavily on diplomatic bandwidth.

A two-speed economy narrows the margin of policy error, particularly in early 2026.

This backdrop echoes in the administration’s newly released National Security Strategy, which employs unusually stark language about Europe’s future. It warns that demographic decline, institutional fragmentation, migration pressures, and insufficient defense investment could leave parts of the continent “unrecognizable in 20 years.” The Strategy reframes Europe less as a postwar project and more as a civilization confronting internal drift. The United States signals continued engagement—but on more conditional terms, emphasizing burden-sharing, energy security, and renewed strategic coherence.

Our view is that the soft landing remains achievable but increasingly delicate. Services continue to provide lift, but with diminishing thrust. Manufacturing remains cautious. Labor is softening more broadly. Inflation continues to ease, but not uniformly. And the Fed must execute a careful recalibration: supportive enough to prevent unnecessary labor weakness, firm enough to preserve credibility, and clear enough to avoid sending markets sprinting ahead of policy.

Private Final Domestic Demand is likely to be weakest at the tail end of 2025 and early 2026. We look for interest-rate-sensitive sectors (housing and consumer durables) to begin to improve by summer and look for inventory rebuilding to add modestly to overall growth.

The economy retains its resilience. But resilience requires continuous adjustment—small corrections made at the right moments to keep the wings level as the air grows thinner. Over the weeks ahead, the skill with which policymakers navigate this narrowing runway will determine whether the economy glides its way into a soft landing or stalls out.

The Week Ahead: December 8-12

The government’s statistical agencies continue to play catch up but the Fed will have to make its decision relying on a mix of private, government and anecdotal reports. The Fed has enough information to make an informed decision.

Tuesday, December 9

NFIB Small Business Optimism (Nov): We are looking for a modest decline in Small Business Optimism, reflecting slowing and uncertain sales and stubborn cost pressures.

JOLTS Job Openings (Sep & Oct): The JOLTS report will provide a much needed update on the labor market. Look for a decline in job openings.

Wednesday, December 10

Employment Cost Index (Q3): We may see slightly more easing on wages, but benefits will likely hold firm. Overall, we look for the ECI to be up 3.6% year-to-year.

FOMC Statement & Powell Press Conference: We are looking for a hawkish quarter point cut, with three and possibly four dissents (one favoring a larger cut and two against any cut at all). Dissents mean less at this time, as a new Fed Chair will likely be announced ahead of the next FOMC meeting in January.

Thursday, December 11

Initial Jobless Claims (week ended Dec 6): Look for a rebound from last week’s holiday-shortened week decline.

Trade Balance (Sep): we are due for a widening in the trade deficit and look for imports to surge on inventory rebuilding and slightly more clarity on tariffs.

Friday, December 12

Fed Speakers: Philadelphia Fed President Paulson (2026 FOMC Voter), Cleveland Fed President Hammack (2026 FOMC Voter), Chicago Fed President Goolsbee (2025 FOMC voter).

Note: while regional Federal Reserve Bank presidents rotate voting roles by year, all members have a voice at every FOMC meeting.

A Market Searching for Confirmation

Financial markets spent the week parsing signals in an environment where the broad story is already understood. Inflation is cooling. The labor market is losing momentum. The Fed is preparing to cut, while remaining cautious about moving too quickly or signaling that it is adopting a more aggressive path. Treasury yields drifted lower following a steady run of dovish remarks from Fed officials. Equities maintained a measured upward bias.

Investors seek confirmation rather than direction. Data continue arriving in fragments—cooler in some places, firmer in others—yielding a narrative that is neither recessionary nor exuberant, but transitional to a lower trajectory. The economy continues to be driven by capital spending, innovation and productivity while households and employers step back from the confidence they carried earlier in the year.

A market in transition: cooling inflation, cooling labor, and investors waiting for proof.

Private data broadly reinforce this more cautious backdrop, with hiring and consumer sentiment slipping further. Anecdotal evidence from the Beige Book and from retail earnings calls echoes the same themes: caution at the register, a sharper tilt toward value, and a resilient core that is carrying more of the load.

The Beige Book’s Quiet Signal: Softer Labor, Cautious Consumers, Capital Still in Command

The Fed’s latest Beige Book strengthened the case for lower rates by underscoring a cooling labor market and a more guarded consumer. Districts reported slower hiring plans, easing wage pressures, and early indications that workers feel less invulnerable than they did in the spring. Retailers and manufacturers noted lighter traffic, thinner order books, and a noticeably defensive posture heading into year-end.

The Beige Book shows a labor market that is cooling, not cracking.

The path forward is not as simple as the data suggests. While the case for easing is convincing, lower rates would almost certainly invigorate financial markets and intensify capital spending—risking a renewed bout of asset inflation at a moment when the Fed is trying to guide the economy toward a softer glide path rather than an upswing in speculative momentum.

Capital investment remains the economy’s stabilizing force. Long-cycle projects—most notably AI infrastructure, energy systems, aerospace, and industrial equipment—continue to provide ballast as other sectors cool. A shift to lower financing costs would likely accelerate this capital-intensive expansion, though potentially at labor’s expense.

A Kansas City contact remarked that it is “a great time to get a tattoo,” because top artists once booked months ahead suddenly have availability. Workers likely feel a little more self-conscious and  less secure about the job market. That is certainly what the data show. Consumer confidence is breaking lower and consumers are becoming increasingly selective.

A Mixed Start to the Holiday Shopping Season

Early retailer feedback and high-frequency trackers suggest the holiday season got off to a strong start on Friday and Saturday. Retailers described crowded stores and active browsing, but conversions were uneven and heavily reliant on promotions. While sales came in at the high end of expectations, shoppers leaned into discounts, prioritized essentials and shied away from expensive discretionary purchases.

This year’s holiday shopping season is defined by large crowds and a discerning consumer.

The tone is value-oriented and price-sensitive. Yet retailers are said to be going into the relatively short traditional holiday shopping season with fewer promotions. This unusual discipline will likely prove short-live and we look for promotions to increase, which will boost volume but compress margins.

The shift mirrors the Beige Book message: the consumer is still engaged but increasingly cautious. The economy is no longer consumer-led; momentum has shifted toward investment and productivity.

ADP Labor Data: A Clear Warning Signal

ADP’s latest NER Pulse report shows that private-sector employers shed an average of 13,500 jobs per week over the four weeks ending November 8. This four-week moving average is the weakest stretch in many months and suggests that labor-market softening is accelerating beneath the surface.

The contraction was broad-based across goods and services. The decline carries heightened significance given the Fed’s comfort with the ADP series and the lack of fresh BLS data ahead of the December meeting. For investors and policymakers, this is the clearest early-warning signal yet that labor-market cooling may be further along than widely acknowledged.

The government shutdown exerted a larger than expected drag on the economy.

Government Shutdown Ended Just in Time

Consumer confidence fell to 88.7, its weakest reading since April. The 43-day federal shutdown, increased layoff announcements, equity volatility, and persistent concerns over inflation dominated write-in responses. The Expectations Index fell to 63.2, its tenth straight month below the recession-signaling threshold of 80.

Sentiment deteriorated across all major demographic and political groups. Big-ticket buying plans slipped, and service-spending intentions weakened. Spending grew solidly in Q3 but now looks more guarded.

Spending ended Q3 on a weak note, with retail sales rising just 0.2% in September—essentially flat in real terms. Goods categories weakened broadly (electronics, nonstore retail, sporting goods, apparel), while spending in food services (restaurants and bars) rose 0.7%, personal care (+1.1%) and miscellaneous retailers (+2.9%) provided stability.

Control-group sales fell 0.1%, reflecting shifting consumer preferences. The “K-shaped” profile persists. Higher-income households continue to spend mostly on services and experiences, while middle- and lower-income households increasingly ration discretionary purchases. This split extends to restaurant dining as well, with fast food and limited service chains seeing slower sales and diminished pricing power, but sales and prices both rising at full service restaurants, particularly at the upper end.

Housing affordability remains stretched, which is keeping a low ceiling on home sales.

AI-Led Capex Continues, but Shipments Slow

Durable goods orders rose 0.5%, supported by a second consecutive 0.9% increase in core orders. Strength remains concentrated in AI-adjacent categories such as information-processing and electrical equipment. But shipments slowed sharply, pushing Q3 equipment investment growth down to 3.1% from 8.5% in Q2. The slowdown caused many forecasters to trim their Q3 GDP estimates.

Corporations continue to benefit from wide margins and low credit spreads. Now, with interest rates falling and expected to remain lower in 2026, we expect the recent strength to broaden beyond AI. Productivity enhancing investment is likely to be pursued by producers of consumer goods, with reshoring efforts becoming more apparent.

Home Prices: Broad Cooling and Shelter Disinflation

National home prices rose just 1.3% over the past year and fell 0.3% month over month in September. All 20 major metros posted monthly price declines (NSA), with Tampa (-4.1% y/y), Phoenix, Dallas and Miami leading the downturn.

Residential rents tend to follow home prices, which means core inflation is headed lower.

Home price growth is expected to fall below 1% before rebounding in mid-2026 as rates decline. The cooling points to shelter inflation decelerating toward 3% by year-end 2026, a key disinflationary tailwind for the coming year. Shelter accounts for just over 44% of the core CPI, so that deceleration should become readily apparent and help bring headline and core inflation back  in line with the Fed’s long-run goal.

PPI: Energy-Driven Rebound, Core Remains Mild

Producer prices rose 0.3% in September as a rebound in wholesale gasoline prices and higher beef prices lifted the headline. Final demand goods advanced 0.9%, the largest gain since February. About 60% of the increase came from gasoline, which surged 11.8%. Energy overall rose 3.5%, food increased 1.1%, and goods excluding food and energy edged up 0.2%. Beef and meats strengthened, along with residential electric power and motor vehicles, while fresh vegetables and nonferrous ores declined.

Final demand services were flat, as a 0.2% drop in retailer and wholesaler margins offset firmer readings in transportation and warehousing (+0.8%) and a modest uptick in services less trade and transportation. Airline fares jumped 4.0%, while margins for machinery and equipment wholesaling fell 3.5%, and portfolio management fees declined 1.2%.

Taken together with the earlier reported CPI, the data imply inflation remain relatively contained in September. The overall PCE deflator likely rose 0.3%, while the core likely rose 0.2%

Fixed Income: Lower Yields, Higher Cut Odds

Treasury yields ended the week 7–9 basis points lower as markets priced in a higher probability of a December rate cut following dovish signals from New York Fed President Williams. Mortgage-backed securities widened on expectations of increased volatility, and primary dealer Treasury holdings climbed to a record $604 billion, highlighting strong demand for duration in a thin-data environment. For funding managers, the message is clear: fixed-income markets remain range-bound heading into the FOMC meeting and a compressed holiday issuance calendar, but positioning is shifting toward rate-cut readiness. Funding conditions are stable, liquidity remains ample, and the window for opportunistic terming-out of debt is still open, although it may narrow quickly once the Fed’s path becomes clearer.

A Winter of Attrition and Narrowing Diplomacy

This winter is shaping up to be one of higher military tempo and shrinking diplomatic opportunity. Ukraine continues to ration artillery and drones, leaning on asymmetric strikes and localized counter-offensives, while Russia presses along multiple fronts and employs increasingly sophisticated Iranian-style drone swarms. President Trump had repeated stated his desire for a peace deal by Thanksgiving and is now probably striving for Christmas or yearend. A poorly structured settlement, however, would risk setting a precedent that could haunt Europe, the United States, and Asia for years to come.

America’s geopolitical bandwidth is fully subscribed, as risks are increasingly intertwined.

Europe’s energy position is stronger than it was in 2022, but its political cushion is notably weaker. Fiscal strains, demographic pressures, and rising populism are chipping away at cohesion. For the United States, the stakes run through two major channels. First, China’s Taiwan calculus: Beijing is studying Ukraine closely as a sandbox for sanctions resistance, supply-chain rerouting, and attrition warfare. Japan is watching with equal urgency. Second, Middle East stability: regional tensions from Syria to the Gulf continue to simmer, with Israel repeatedly disrupting rearmament efforts by Hezbollah and Hamas.

Piedmont Perspective
“Societies fray gradually, not suddenly.” — Tolstoy

The tragic shooting of two National Guard troops in Washington this week is a reminder of how thin the seams of American public life have become. These were young Americans serving in the capital, far from any battlefield, yet caught in the undertow of a society that feels more strained and brittle than it did only a few years ago.

Tolstoy’s A Confession offers an unsettling parallel. Writing in 1882, he warned of a “corrosion of spirit,” a gradual loss of meaning and connection that takes hold as trust erodes. Societies rarely break in a single dramatic moment. They often come apart slowly, thread by thread, as small tears go unattended and the bonds that once held communities together weaken through neglect, fatigue, or indifference.

The erosion of societal norms rarely announces itself. It begins subtly through frayed trust, rising cynicism, and quiet withdrawals from community long before it becomes visible in headlines or data.

The pressures visible today follow that pattern. Economic strains linger even as the broader economy shows resilience. Institutional missteps and political volatility have fed a deeper sense of skepticism. Inequality continues to shape how people experience opportunity and stability. On top of this sits an information environment built for speed and outrage. Social media, partisan echo chambers, and parts of the press often reward provocation over clarity. This dynamic does not cause violence by itself, but it increases isolation, weakens judgment, and makes the cracks in society more difficult to repair.

None of this reduces individual responsibility or simplifies the complexity of a single act. It does, however, form the context in which too many people now struggle with belonging, purpose, and confidence in their institutions. The sense of drift is widespread across demographic, regional, and political lines.

Tolstoy did not write to encourage despair. His goal was to highlight the need for repair and renewal. Resilience comes from the basic ties that make a society work: trust built in small interactions, communities that extend beyond politics, institutions that act transparently and with restraint, and citizens who view themselves as stewards of the wider republic rather than spectators to it.

Resilience is rebuilt the same way it frays: gradually. Small acts of trust, service, and accountability reverse the drift.

A quieter point sits underneath all of this, and it carries economic relevance. Markets may focus on inflation prints, labor data, and the next move from the Federal Reserve, but confidence does not exist in a vacuum. A society that feels strained or disconnected becomes more sensitive to shocks and more reactive to uncertainty. The same “erosion of norms” that weakens civic life also shows up in survey data, consumer behavior, and risk appetite. This past week’s declines in confidence and more selective holiday spending fit that pattern.

As we sift through the latest economic signals, it is worth remembering that the country’s real strength has never been measured only in GDP releases, employment reports or by the shape of the yield-curve. It comes from the people who show up each day. It comes from workers and soldiers, first responders and teachers, public servants and small-business owners, as well as families and communities that create the quiet foundation of civic life.

We honor the two Guardsmen, one who lost her life and one who continues to fight for his, by remembering that our institutions endure because free citizens build them, protect them, and hold them accountable. That commitment to a free society remains the quiet engine of American resilience. It is not the businesses or institutions themselves that define our strength, but rather our capacity to create, renew, and reinvent them. At a time when the headlines lean toward division, it is this shared responsibility that gives the country its greatest advantage and helps steady the broader economy when uncertainty rises.

Foreign Direct Investment: Capital as Diplomacy

The Trump administration’s new international investment framework signals a pivot from tariff-centric confrontation toward a more deal-driven form of economic statecraft. The emerging strategy treats access to U.S. capital, corporate partnerships, and investment guarantees as tools of geopolitical influence—leveraging balance sheets where sanctions and tariffs have begun to hit diminishing return.

Recent Bloomberg analysis notes that while headline pledges of a $20-trillion investment boom are materially overstated, identifiable commitments still run into the multi-trillion range and concentrate heavily in advanced technologies, energy systems, and strategic manufacturing. Bloomberg’s more conservative analysis puts the total at closer to $7 trillion, which is still a hefty sum.

A multi-trillion dollar investment push creates upside risk for U.S. capex and long-run growth.

A sustained wave of cross-border projects—even at the lower, independently verified scale—would carry real macroeconomic weight. In a world reshaped by reshoring, friend-shoring, and supply-chain redundancy, expanded U.S. investment from abroad would reinforce the capital-led expansion already underway. Sectors such as AI infrastructure, semiconductors, energy platforms, defense technology, and advanced logistics anchor the current cycle; additional international activity would deepen order books for U.S. suppliers and add upside risk to near-term capex and GDP.

Context matters. The entire stock of foreign direct investment already in the United States stands at roughly $7.1 trillion, at current costs, while U.S. direct investment abroad totals about $6.8 trillion. Even a modest, sustained increase in direct investment flows, well below Trump’s touted figures, would still be large relative to the existing base and could meaningfully support long-run potential GDP. If the Bloomberg analysis is accurate, then $7 trillion in additional foreign direct investment would roughly double the stock of facilities currently in place. To borrow a phrase from president Trump, that would be ‘huge’. The initiative’s emphasis on advanced manufacturing, data-driven systems, and modern energy would also reinforce productivity, raise global demand for U.S. goods and services, and extend the reindustrialization impulse that has defined this cycle.

There are trade-offs. Politically influenced investment flows tend to be lumpy, with project timing and approval tied to negotiations rather than purely economic returns. That increases volatility and makes the growth path more corridor-shaped than smooth. But the broader takeaway is clear: cross-border capital is becoming a strategic asset. Its deployment will be more dynamic and less predictable—but also rich with opportunity for the sectors aligned with the administration’s priorities.

Drifting Toward Easing, Still Waiting for Data

Equities closed the week with a modest gain, helped by a modest decline in Treasury yields and slightly tighter credit spreads. The S&P 500 and Dow ended the month in positive territory, while the Nasdaq slipped fractionally. With no employment report ahead of the FOMC meeting, markets are trading on inference rather than evidence, waiting for data that either validates the soft-landing narrative or complicates it.

With Santa leading the rally, the markets are waiting for confirmation, not direction.

The Fed’s runway for easing remains visible but narrow. A December cut now appears highly likely, yet visibility beyond that is hazy at best. We anticipate clarity on Powell’s successor by yearend, with Kevin Hassett emerging as the leading candidate. Powell, for his part, seems intent on leaving room for his successor to navigate what may become a more complicated early-2025 policy landscape.

The Week Ahead: December 1-5

We continue to wait for federal agencies to catch up with the economic data. Private data continue to offer the best intel of current economic conditions.

Monday, December 1

Look for credit card data and other private high frequency data for an assessment on Black Friday and opening weekend holiday retail sales.

We will also get a couple of readings on the manufacturing sector, with S&P final PMI at 9:45 and ISM Manufacturing Index at 10:00 am. The ISM Manufacturing Index has been stuck at just under 50 but well north of the 43.7 level that is typically consistent with recession. The more leading indicators have recently been hinting at some reacceleration, but it is likely too soon to see that in this report.

Jerome Powell will provide remarks before joining a panel on George P. Shultz and his economic policy contributions at the Hoover Institution at 8:00 pm.

Tuesday, December 2

Michelle Bowman, as Fed Vice Chair for Supervision, is scheduled to testify before the U.S. House Committee on Financial Services.

We will also get data on U.S. light vehicle sales and reports on sales for Cyber Monday.

Wednesday, December 3

We will get the latest update on ADP employment for November. The October report posted an increase of 42,000 private-sector jobs. We are also scheduled to receive reports on import prices, as well as the final S&P Services PMI and the ISM Services Index. The latter will be closely scrutinized for updates on employment and prices.

Thursday, November 26

We will receive weekly first-time unemployment claims and are also scheduled to receive October merchandise trade data.

Friday, November 27

We will close the week with a look at September personal income and spending, as well as inflation data. Personal income is expected to rise 0.4%, while consumer spending should rise 0.2%, or essentially flat after inflation. Services outlays are a bit of wildcard.

We will also get preliminary University of Michigan Consumer Sentiment and Consumer Credit use data for the month of October late Friday afternoon.

An Economy Tilting Toward Capital and Resilience

A consistent pattern emerges across the Beige Book, durable-goods orders, home prices, labor data and capital spending: the U.S. economy is gradually shifting toward a capital-led, innovation-driven expansion. AI infrastructure, industrial construction, aerospace, energy systems, logistics and defense technology are becoming the structural supports of the cycle.

The investment boom is being supported by wide corporate margins, strong order books, reshoring initiatives and a growing pipeline of public and private projects. This shift toward capital deepening and productivity-enhancing investment gives the economy a sturdier foundation than headlines often suggest.

The outlook is not without risk, but also not without promise. Consumers remain under pressure. Labor markets are cooling. The inflation fever has broken but has not fully subsided.  Even so, an investment-centric expansion can support stronger long-run growth, greater supply-chain resilience and a healthier balance between consumption and production.

A Clearer View of a Cooling Economy

The past week provided a clearer window into the post-shutdown macro environment, and the data that emerged fit neatly within the framework laid out in the latest CAVU Compass. The economy continues to expand, but its pace has become more deliberate and uneven. Third-quarter GDP still appears stronger than initially expected, supported by a narrower trade deficit and firmer construction activity. Yet the underlying rhythm of domestic demand is clearly more moderate than the headline suggests. As the flow of data normalizes, the picture that emerges is not of an economy accelerating into late 2025 but of one easing gradually onto a slower trajectory.

Following a surprisingly strong Q3, growth remains positive but is no longer accelerating.

Growth remains positive but is no longer accelerating
Labor market developments continue to warrant close attention. Headline payroll gains in September were firmer on the surface, but the downward revisions to August and the softening three-month average are more revealing. Initial jobless claims remain low, but continuing claims have risen steadily—an early sign that job seekers are taking longer to reattach to the workforce

The more consequential development came via the Challenger job-cut announcements, which have now begun to rise after months of relative stability. These are not broad-based layoffs, but targeted reductions across a widening set of industries, signaling a shift from hiring freezes toward more active cost control.

Consumers, meanwhile, remain under pressure. The final University of Michigan Sentiment Index slipped again, reinforcing a theme that has persisted all year: the dominant source of household stress is not fear of unemployment but the cost of living. Elevated rent, insurance, mortgage payments, and utilities continue to weigh on household budgets even as inflation recedes. This gap—between the employer’s view of labor costs and the household’s view of affordability—remains one of the defining tensions of this cycle.

Persistent affordability challenges and a soft job market for recent college graduates is driving anxiety.

The latest Consumer Sentiment data show consumers generally feel more pessimistic about their current financial situation, with buying conditions for durable goods falling to their worst level in more than 40 years, even as year-ahead and long-run inflation expectations eased for a third straight month. Sentiment declined across all income groups, but remains most depressed among lower-income households, reflecting the growing bifurcation of the American consumer.

Monetary policy sits squarely in this middle ground. The October FOMC minutes underscored a divided Committee heading into the December meeting, with members split between the need for additional insurance cuts and the risk of moving too quickly in the absence of fresh official data. Shutdown-delayed payroll and inflation releases mean the Federal Reserve is flying with only partial visibility.

With official economic data still playing catch-up, the Fed will likely err on the side of caution and cut rates at their December FOMC meeting

Market pricing already reflects a multi-quarter sequence of slow, measured rate cuts. The modestly positive slope of the yield curve aligns with this expectation: the curve is not pricing recession, but neither is it pricing acceleration. Rather, it reflects an economy in controlled deceleration with a central bank intent on maintaining credibility.

The curve is modestly positive—and telling a very different story from a year ago

Energy and commodities introduced a notable shift in tone this week. Oil prices eased as reports suggested a potential peace framework between Russia and Ukraine, reducing one of the most important geopolitical risk premia embedded in global commodity markets. Even tentative negotiations can influence pricing when the conflict has disrupted energy flows, shipping routes, and insurance costs for nearly four years. If the diplomatic signals materialize into a more durable arrangement, the corresponding easing in supply risk could prove meaningful for oil, natural gas, wheat, and industrial inputs.

In a major switch, geopolitics appear set to pull prices lower, rather than push them higher

This development comes atop the largest LNG supply wave in history, which is set to expand global energy capacity through the second half of the decade. Together, these forces create a more stable and potentially more disinflationary energy environment going into 2026 that will be more favorable to energy-intensive industry and energy-import dependent economies.

Housing has shown signs of stabilization rather than recovery. Existing home sales have drifted higher, mortgage rates have eased modestly, and builder sentiment has improved. Builders continue to rely on incentives and selective price adjustments, but inventories are better balanced and construction spending has leveled off. Affordability remains the principal obstacle, and it will likely remain so until borrowing costs decline further or wage growth firms.

Housing affordability remains stretched, which is keeping a low ceiling on home sales.

Overall, we see the economy entering a short 6–8 month lull, with growth averaging roughly 2% through spring. This softer patch should also ease some of the pressure that has built up on household budgets over the past two years. That pause should help recharge household balance sheets as grocery prices, fuel, and rents ease further.

Housing is already seeing a bounce, albeit off low levers, as builder discounts and rising existing-home inventories begin to restore affordability. With sales picking up, we expect inventories to normalize over the next few months, giving way to improving starts in the second half of 2026. Stronger home sales will also support demand for furniture, appliances, and other home-related goods.

Geopolitical risks remain present across multiple theaters. The UN-backed Gaza stabilization proposal continues to face significant obstacles, while intermittent escalation along the Israel–Hezbollah border remains a concern. Saudi Arabia’s normalization conditions—security guarantees, nuclear cooperation, and progress on the Palestinian track—signal long-term strategic alignment but short-term caution. The U.S. naval buildup near Venezuela suggests heightened tension even if financial markets have yet to price it in.

Risk repricing remains one headline away amid a flurry of major new developments.

The overarching narrative continues to evolve into the tension we highlighted in our Piedmont Perspective. Official data suggest a cycle that is slowing but intact. Markets see a credible path toward easing, and corporate investment signals cautious forward momentum. Yet for many households, the lived experience of the economy feels materially different from the aggregates. The divide echoes the contrast between The Wizard of Oz—optimistic, institutionally confident—and Wicked, which interrogates unequal realities and curated narratives.

Navigating the Cycle: A CFO’s Playbook

For finance executives, this environment argues for maintaining liquidity buffers, extending maturities selectively, and preserving optionality as the Federal Reserve navigates a shallow easing cycle. The modestly positive yield curve supports favorable laddering strategies. Softening sentiment and rising Challenger cuts suggest a cautious consumer in early 2026, reinforcing the need for disciplined working-capital management.

At the same time, firms with marketing scale and brand reach are capturing disproportionate wallet share. McDonald’s and Walmart continue widening their advantage through value-driven messaging, while Lowe’s is separating from peers in a slowing home-improvement market. This “marketing-heft dividend” underscores the value of brand investment, loyalty platforms, and customer analytics in an affordability-constrained environment. Treasury desks should also monitor commodity developments closely—particularly the Ukraine peace discussions—which are already influencing oil and grain curves.

Piedmont Perspective

We take pride in continuously analyzing every dimension of life—business, culture, sports, and geopolitics—through the lens of economics. This week, we turn our focus to the release of Wicked for Good, the second installment of the Wicked film series, inspired by the acclaimed Broadway production and early works.

Emerald Cities and Economic Narratives

Economic narratives have always carried political weight. Few cultural touchstones illuminate that better than The Wizard of Oz and its modern counter-story, Wicked. They share the same fictional landscape but reflect very different American moods—and they mirror the questions resurfacing today amid rising debts, monetary uncertainty, and geopolitical recalibration.

Baum’s 1900 novel emerged from a nation still defining itself after the Spanish-American War, the closing of the frontier, and the growing pains of an industrial republic. The fiercest policy conflict of the era revolved around money—specifically whether the country should maintain the gold standard or adopt a bimetallic system. Populists championed Free Silver as a way to ease deflation and reduce debt burdens; William Jennings Bryan’s “Cross of Gold” speech cast the stakes in moral—and unmistakably populist—terms. “You shall not crucify mankind upon a cross of gold,” he warned, arguing that monetary policy was not merely an economic mechanism but the fulcrum upon which fairness, opportunity, and national identity turned.

Baum encoded this debate into Oz with deliberate precision. Dorothy’s silver shoes (made ruby by Hollywood) walking the yellow-brick road depicted the competing visions of monetary orthodoxy. The Wicked Witch of the East symbolized eastern industrial-financial power; the Wicked Witch of the West represented western monopolies and the harsh economic realities of the frontier. The Good Witches stood in for reform movements challenging these regional forces. And the Wizard—charismatic, theatrical, ultimately exposed—embodied political and economic elites whose authority depended more on spectacle than insight.

Baum’s deeper argument was democratic: the Scarecrow, Tin Man, and Lion demonstrate that clear thinking, hard work, heart, and courage often reside in ordinary citizens rather than in the technocrats behind the curtain. The people of Oz represented the American public—farmers, workers, and small merchants navigating the real economy.

The 1939 Technicolor film softened the populist edge but preserved the essential message: institutions can be flawed, authority can be illusory, and resilience often comes from within. It was optimism forged in scarcity and anxiety, but optimism nonetheless.

A century later, Wicked turns that optimism inward and interrogates it. The America of Maguire’s novel had lived through Watergate, the Cold War’s end, globalization, and rising mistrust of institutions. In this retelling, the Wizard is not a harmless showman but an architect of narrative control. “Wickedness” becomes a label attached to dissent. And Elphaba—the so-called Wicked Witch—embodies the truth-tellers: whistleblowers, reformers, independent analysts, journalists, and skeptics who expose uncomfortable facts and disrupt carefully managed narratives. Her crime is not malevolence but refusing to participate in the institutional fiction.

Stories shape markets as much as actual data.

This prism aligns Wicked with a broad set of contemporary political forces—populist movements on the left and the right; anti-corruption and transparency advocates; civil-liberty and privacy groups; anti-monopoly coalitions; critics of surveillance and state secrecy; and reformers who warn that narrative control is now a central tool of political power. They share a common belief: the official story is not the whole story.

That contrast—Baum’s confidence in citizen agency versus Maguire’s skepticism toward institutional motives—resonates sharply today. The economy is wrestling with record debts, widening fiscal imbalances, uneven mobility, and renewed debates over the nature of money. Polarization now functions as a currency of its own, and the powers that be—across both political camps—deploy it to shape narratives, mobilize supporters, and pressure institutions.

The echoes of silver-vs-gold appear in arguments over digital currencies, Federal Reserve independence, and whether the United States can sustain monetary primacy amid geopolitical fragmentation. The public is once again asking Baum’s essential questions: How durable is the system? Do the experts truly know what they’re doing? And what happens when confidence in the narrative begins to crack?

Both Oz stories converge on a single lesson: power rests on controlling the narrative. Baum argued that ordinary Americans possessed more agency than they knew. Wicked warns that institutions can—and often do—shape stories to protect their own fragility. Today’s monetary debate—deficits, the dollar’s role, digital alternatives—sits squarely between those worldviews.

In every era, there is always someone behind the curtain.

Those navigating the cycle can follow the yellow-brick road, but—as Baum implied—they should never lose sight of whoever is pulling the strings behind the curtain.

The Week Ahead: November 24-28

Next week will bring a full set of economic releases, as the government agencies continue to catch up from the government shutdown.

Tuesday, November 24

Will bring reports on September Retal Sales, as well as the September Case-Shiller Home Price Indices. We will also get the Business Inventories for August, Pending Home Sales for October and the November Consumer Confidence Index. The retail sales data and Consumer Confidence data will likely garner the most attention, as they will provide insight into how much momentum the economy had at the end of the quarter and a look into consumers’ minds just ahead of the holiday shopping season. We look for a solid increase in retail sales and a modest dip in Consumer Confidence, reflecting the growing number of layoff announcements.

Wednesday, November 25

We will get our first look at third quarter real GDP. We are projecting 3.7% growth for the quarter but this past week’s trade data, which showed a narrower goods deficit, raises the risk of an upside surprise. The Commerce Department will also report personal income and consumer spending, which will also provide some updated price information.

A Stronger GDP report may fan fears that the Fed will take a pass at cutting rates in December. We do not think they will. What little data we have for the fourth quarter suggests the economy lost considerable momentum and that the drag was accelerating just before the government shutdown ended. The call on the field is a quarter point cut. The Fed will need to see overwhelming evidence to overturn that call.

Thursday, November 26

Thanksgiving Day!

Friday, November 27

The Chicago PMI for November is on the only variable on deck. The report may show some modest improvement. The markets will also likely be on the lookout for early signs of the strength of retail sales at the official start of the holiday shopping season, paying close attention to real time tracking measure and credit card data.