[Fed Watch] U.S. Jobs and Unemployment Jump Together, Leaving December Rate Outlook Unclear

First U.S. Jobs Data Released Since the Shutdown Sends Mixed Signals
AI-Driven Job Shock, Fewer Immigrants, and Budget Cuts Push Unemployment Higher
“Hold or Cut?” — Opinions Split on the Federal Reserve’s Next Rate Move

The U.S. government’s month-long shutdown delayed key economic releases, and the newly published data has rattled financial markets. The first official labor report in weeks delivered mixed signals about the job market. As a result, expectations for a Federal Reserve rate cut in December are now split across the market.

Mixed Signals in the U.S. Labor Market

On the 20th, the U.S. Bureau of Labor Statistics (BLS) released the September employment report—its first official publication since data releases were halted during the record-long 44-day federal government shutdown. During the shutdown, major statistical agencies such as the BLS and the Bureau of Economic Analysis (BEA) were prohibited from collecting or publishing data.

According to the report, U.S. nonfarm payrolls increased by 119,000 in September, more than double the consensus estimate of 50,000. However, the BLS revised July job gains down to 72,000—about 7,000 fewer than previously reported—and sharply revised the August figure from a gain of 22,000 to a loss of 4,000. These adjustments indicate that the labor market had already been weakening before the shutdown began.

The unemployment rate moved in the opposite direction. It rose to 4.4% in September, up from 4.3% in August. This marks the highest level since October 2021—when the economy was still dealing with COVID-19 disruptions—and exceeds market expectations of 4.3%.

Why Is the U.S. Unemployment Rate Rising?

A key factor behind the spike in U.S. unemployment is the AI-driven “employment shock.” According to a recent report from Challenger, Gray & Christmas (CG&C), U.S. companies announced 153,074 layoffs last month—an increase of about 183% from the previous month (54,064) and 175% from a year earlier (55,597). It is the highest October figure since 2003, when the dot-com collapse led to large-scale mergers, acquisitions, and layoffs in the IT sector.

The tech industry accounted for much of the surge. Technology-sector layoffs reached 33,281 last month, up nearly 490% from September (5,638). As major U.S. tech companies ramp up AI investment, they are cutting workers whose roles can be replaced by AI tools. Amazon announced 14,000 layoffs late last month, while Microsoft unveiled plans in July to cut 9,000 jobs. CG&C noted that “disruptive technologies are once again reshaping industries, much like in 2003,” adding that companies typically avoid making layoff announcements in the fourth quarter ahead of the holiday season, making this October’s wave unusually harsh.

Federal budget cuts have also weighed on the labor market. The number of federal government employees—around 3 million last year—began declining in February under the Department of Government Efficiency (DOGE), established in Trump’s second term. According to the BLS, federal employment fell by 97,000 from January to August, including a loss of 15,000 jobs in August alone.

Falling immigration has been another major drag. A report released on the 24th by the Bank of Korea’s U.S.–Europe Economics Team estimates that 45% of this year’s U.S. employment decline stems from reduced labor supply caused by falling immigration. Net immigration has plunged from roughly 3 million in 2023 to about 500,000 this year.

Where Will Rates Go in December?

The turmoil in the labor market has made the Federal Reserve’s December FOMC decision more complicated. Within the Fed, caution toward an immediate rate cut appears to be the prevailing view. Minutes from the October meeting noted that “many participants saw it as appropriate to keep rates at their current level through the end of the year” and that “most participants saw room for further cuts ahead, but not necessarily in December.” However, several dovish members reportedly believe a December cut would be appropriate if the economy evolves as expected.

Expert opinions are also divided. According to Bloomberg, Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said the September jobs report “does not contain anything that would change our expectation that the Fed will hold rates steady in December.” By contrast, Andrew Hollenhorst, Citi’s chief U.S. economist, told The New York Times that the “more important metric to watch is the unemployment rate,” projecting that the Fed may lean toward a cut.

Financial markets have slightly raised their expectations for a December rate reduction. According to CME FedWatch, futures markets now assign a 39.1% probability to a 0.25 percentage point cut at the December FOMC meeting—up from 30% the previous day. Still, with a 60.9% probability assigned to a hold, expectations for a December cut have yet to become the dominant outlook.