Expectations heading into last month’s employment report were understandably subdued. June and July had produced exceptionally weak initial payroll readings, while the economy continued to navigate uncertainty from the war in the Middle East, ongoing trade tensions, and an approaching U.S. midterm election. Against that backdrop, August was about as close to a clean sweep as an employment report gets. Nonfarm payrolls increased by 162,000, more than five times the average monthly gain of the previous twelve months, while unemployment held at 4.1 percent. Just as importantly, June and July were revised upward by a combined 55,000 jobs, breaking with a pattern that had persisted for much of the past year in which initial payroll estimates were repeatedly revised lower.

The household survey was equally encouraging. Employment increased by 569,000 as the labor force expanded, pushing the participation rate from 61.4 percent to 61.6 percent and the employment-to-population ratio from 58.9 percent to 59.1 percent. Meanwhile, the number of people working part time for economic reasons fell by 414,000 and the broader U-6 unemployment rate declined from 7.9 percent to 7.7 percent. The unemployment rate therefore remained at 4.1 percent even as more people entered the labor force and found work. Wage growth was similarly constructive, with average hourly earnings increasing 0.3 percent in August and a relatively contained 3.1 percent over the past year.

The establishment survey also showed that the improvement was broadly based. Private-sector payrolls increased by 127,000, with gains across much of the economy. Particularly encouraging were two economically sensitive sectors: construction added 22,000 jobs, while manufacturing gained 16,000 and has now added 58,000 jobs since its recent low in December 2025. The manufacturing diffusion index jumped to 61.1, suggesting that employment gains were spreading across the sector rather than being concentrated in a handful of industries. The notable exceptions were information, which lost 23,000 jobs, and financial activities, which declined by 11,000. Overall, the breadth of hiring reinforced the message coming from both the headline payroll number and the household survey.

As the accompanying exhibit illustrates, however, one of the most consequential numbers in the August report may have been one of the least conspicuous: the average private-sector workweek increased by 0.1 hour to 34.4 hours, its highest level since 2024. Six additional minutes of work per employee per week hardly sounds significant. Spread across roughly 135.7 million private-sector payroll jobs, however, that seemingly small increase represents approximately 13.6 million additional labor hours every week. At the current 34.4-hour average workweek, that is the labor-hour equivalent of roughly 395,000 additional jobs. Even measured against a conventional 40-hour workweek, it represents approximately 339,000 full-time jobs worth of additional weekly labor input. This does not mean the economy actually created another 395,000 jobs, but it demonstrates why changes in hours worked can sometimes convey as much information about underlying labor demand as the headline payroll number itself.

The implications extend beyond August. When demand for goods and services strengthens, businesses do not necessarily respond by immediately hiring additional workers. Employers can first increase the utilization of their existing workforce by extending hours. If demand persists, hiring becomes the next margin of adjustment. The increase in the workweek may therefore be telling us something about future hiring as well as current economic activity. It also has important implications for household income. With both hourly earnings and hours worked increasing, average weekly earnings rose roughly 0.6 percent in August, while the BLS index of aggregate weekly payrolls, which incorporates employment, hours and wages, increased 0.7 percent. Households ultimately spend income, not hourly wage rates, and the combination of more people working, longer hours and higher wages provides additional support for consumption.

Exhibit: Average weekly hours worked. More hours equal more income and growth.

Source: U.S. Department of Labor

John Maynard Keynes is famously credited with saying, “When my information changes, I alter my conclusions. What do you do, sir?”¹ As our readers know, we have been concerned about deterioration in the labor market for some time, and a report as broadly positive as this one requires us to remain open to the possibility that conditions are improving. August was unquestionably encouraging, and continued strength in employment, hours worked, participation and industry breadth would make us increasingly optimistic about the labor-market outlook. At the same time, one report does not make a trend. Payroll estimates remain subject to subsequent revisions and the annual benchmark process, and some of the current strength may reflect powerful but potentially temporary tailwinds from the OBBB and the extraordinary boom in data-center and related infrastructure construction, with effects extending into manufacturing, utilities and other peripheral industries. For now, the August report deserves to be viewed for what it was: an exceptionally positive change in the information in front of us. We will keep an open mind about what that information is telling us while remaining careful not to extrapolate a new trend just as some of the forces supporting it may be approaching their peak.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

[1] Attributed to John Maynard Keynes by Paul A. Samuelson in “The Keynes Centenary,” The Economist, vol. 287 (1983), p. 19. The remark is widely attributed to Keynes, though no definitive primary-source record of Keynes saying it has been identified.

Over the past several weeks, the yen has returned to the forefront of global currency markets news after Japanese authorities, with support from the U.S., intervened to arrest a renewed slide in the currency. The move came after the yen weakened toward roughly ¥164 per dollar, its lowest level in decades, before coordinated yen-buying helped push the currency back toward its strongest level in about three months. The size and coordination of the intervention sent a clear message that policymakers are uncomfortable with the speed and scale of yen depreciation. But while the action may have temporarily disrupted positioning and forced some short-term yen strength, it does not address the deeper forces that have been driving the currency lower in the first place.

The central problem remains the wide gap between Japan’s policy settings and those of the rest of the developed world, particularly the U.S. Even after the Bank of Japan began moving away from ultra-easy policy, Japanese interest rates remain far below U.S. rates, leaving the yen exposed as a funding currency for global carry trades. That interest-rate differential encourages investors to borrow in yen and allocate capital into higher-yielding markets, creating a persistent source of selling pressure on the currency. Even with the sharp move higher in Japanese government bond yields, the rate gap versus the U.S. remains wide across the curve, leaving the yen structurally exposed as a funding currency for carry trades, as shown in Exhibit 1. Intervention can disrupt that trade temporarily by forcing short-covering and raising the cost of speculation, but it does not remove the underlying incentive to fund in yen as long as Japanese yields remain structurally low.

Exhibit 1. U.S. Treasury yields remain well above Japanese government bond yields across the curve.

Source: Bloomberg

The reason those yields remain low is that the Bank of Japan has limited room to tighten aggressively. Japan’s economy remains fragile, with weaker external demand, pressure on households from higher import costs, and a government debt burden that makes a disorderly rise in long-duration Japanese government bond (JGB) yields difficult to tolerate. The BOJ has begun reducing its outright purchases of JGBs, but the process remains gradual, and the Bank has preserved the option to increase purchases or conduct fixed-rate operations if long-term yields rise too quickly. That continued support helps prevent Japanese yields from fully adjusting to inflation, fiscal risk, and currency weakness, thereby preserving the rate differential that keeps the carry trade alive.

The recent spike in oil prices adds another layer to this constraint. Japan’s trade balance has already moved back into deficit, with the deficit reaching ¥406.9 billion in June compared with a surplus of ¥122 billion a year earlier, as imports rose sharply on the back of higher oil prices and a weaker yen.¹ Japan’s trade position has also turned less supportive, with the balance moving back into deficit in May and June as higher oil prices and a weaker yen lifted import costs, as shown in Exhibit 2. This matters because Japan imports nearly all of its crude oil, meaning higher energy prices quickly translate into a larger import bill and a direct hit to domestic purchasing power. BOJ Governor Kazuo Ueda has described this dynamic clearly, noting that for a commodity-importing economy like Japan, higher crude oil prices deteriorate the terms of trade by increasing the outflow of income overseas and placing downward pressure on the economy.² BOJ Board Member Junko Koeda has made a similar point, arguing that soaring crude oil and food prices have driven up import prices and worsened Japan’s terms of trade.³ In other words, the oil shock is not simply an inflation problem for Japan; it is a real-income shock that weakens demand, squeezes households, and makes it even harder for the BOJ to tighten policy aggressively in defense of the currency.

The U.S. Treasury market adds another complication. Japan remains one of the largest foreign holders of U.S. government debt, while the U.S. is running large fiscal deficits and remains dependent on foreign demand to absorb heavy Treasury issuance. That makes large-scale Japanese Treasury sales to fund yen support uncomfortable for Washington, because they could add pressure to a Treasury market already managing significant supply. Expanded repo facilities may reduce the immediate need for outright Treasury sales by allowing Japan to borrow dollars against its holdings, but that is a liquidity bridge rather than a long-term solution. It does not change the underlying imbalance: Japan still needs low domestic yields, the U.S. still needs foreign demand for Treasuries, and the yen carry trade remains supported by the policy gap between the two.

This is why intervention is unlikely to provide a durable solution. It can bend the hose for a period of time by slowing the flow of yen selling, disrupting positioning, and signaling official discomfort with disorderly currency moves. But it does not turn off the water. As long as Japan’s economy remains too fragile for aggressive tightening, the BOJ continues to support the JGB market, oil prices pressure real incomes, and the U.S. fiscal imbalance leaves the Treasury market dependent on stable foreign demand, the structural forces behind yen weakness remain in place. That matters not only for the yen, but for financial markets more broadly. The yen carry trade has become deeply embedded in global risk-taking, and a disorderly unwind could quickly spill over into rates, equities, credit, and broader liquidity conditions. In that sense, failed intervention would not simply represent a currency-market problem; it would increase the risk of wider financial-market volatility at a time when policy flexibility is already constrained on both sides of the Pacific.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

Source notes

1. AP News, “Japan’s exports and imports grow as yen weakens,” July 23, 2026. The article cites Ministry of Finance data showing a ¥406.9 billion June trade deficit, versus a ¥122 billion surplus a year earlier, and notes that higher oil prices and a weaker yen raised import costs.

2. Bank of Japan, Kazuo Ueda, “Speech by Governor Ueda at the Kisaragi-kai Meeting in Tokyo,” June 3, 2026. Ueda stated that, for a commodity-importing economy like Japan, higher crude oil prices deteriorate the terms of trade by increasing the outflow of income overseas and placing downward pressure on the economy.

3. Bank of Japan, Junko Koeda, “Economic Activity, Prices, and Monetary Policy in Japan,” speech at a meeting with local leaders in Fukuoka, May 21, 2026. Koeda noted that soaring crude oil and food prices drove up import prices and contributed to a deterioration in Japan’s terms of trade.

Markets care about elections because elections can alter the expected path of fiscal policy, regulation, taxation, government spending, and the broader policy environment in which businesses operate. That importance often shows up in the form of pre-election hesitation, as investors wait for uncertainty to clear, followed by post-election relief once the range of possible outcomes narrows. This does not mean elections mechanically determine market returns, but they can influence risk appetite, discount rates, and investors’ willingness to look through near-term policy uncertainty.

For that reason, we distinguish between the periods before and after 1982. The earlier postwar decades reflected a fundamentally different investment environment, shaped by higher structural inflation, less globalized capital markets, lower household equity ownership, and a more limited role for financial markets in the broader economy. Since the early 1980s, the secular decline in interest rates, the expansion of retirement investing, the globalization of capital markets, and the emergence of 24-hour financial and political news have made markets more responsive to policy developments and elections more relevant to investors than they were during much of the postwar period.

The historical record suggests that investors often adopt a wait-and-see approach as midterm elections draw near. While there is little evidence of widespread selling ahead of Election Day, equity returns have generally been more subdued during the months immediately preceding the vote. Since 1946, the S&P 500 has generated an average return of 0.8% in July, followed by a cumulative gain of just 0.7% over the August through October period. Restricting the analysis to the period since 1982 yields a similar conclusion. Average July returns have been 0.2%, while the market has advanced 2.0% over the final three months before the election. Although every election cycle is unique, the consistency of these relatively muted pre-election returns suggests that investors often defer larger portfolio decisions until the election outcome, and the resulting policy landscape, become clearer.

Exhibit 1: S&P 500 Performance prior to mid-term elections

Source: ICG Advisors

If the months leading up to a midterm election are characterized by investor caution, the period immediately afterward has historically reflected renewed confidence. As shown in Exhibit 1, the S&P 500 has produced meaningfully stronger returns during the six months following midterm elections than during the months immediately preceding them. Since 1982, the index has generated an average return of 12.3% between November and April, compared with 2.0% over the August through October period. The pattern is similarly evident over the full postwar sample, with average post-election gains of 14.3% versus 0.7% during the final three months before Election Day. Perhaps more importantly, this post-election acceleration in returns has remained remarkably consistent despite the fundamental changes in financial markets, capital flows, investor participation, and the information environment that have occurred since the early 1980s. The evidence suggests that while the market environment has evolved considerably, the tendency for investors to respond favorably once electoral uncertainty has been resolved has remained largely unchanged.

The historical record also suggests that the degree of post-election relief has depended on whether the election altered the overall structure of government. As shown in Exhibit 2, the strongest post-midterm returns have historically occurred when control of the White House, House of Representatives, and Senate remained unchanged following the election, regardless of which political party held those institutions. Since 1982, the S&P 500 has generated an average return of 21.2% during the November through April period when the structure of government was unchanged, compared with 8.9% when at least one branch changed political control. A similar relationship is evident in the earlier postwar period, with average returns of 16.1% and 8.1%, respectively. While the sample size is naturally limited, the consistency of these results suggests that investors have historically placed a premium on policy continuity. Markets appear to respond less to which party wins than to whether the election produces a stable and predictable policy environment.

Exhibit 2: S&P 500 Performance post mid-term elections

Source: ICG Advisors

The current political backdrop also has relatively few historical precedents. Since World War II, there have been just three prior midterm elections that began with Republicans controlling the White House, House of Representatives, and Senate, as is the case today. In each instance, voters shifted control of at least one chamber of Congress, ending unified Republican control following the election. Despite those political changes, the S&P 500 generated an average return of 11.8% during the subsequent November through April period. While three observations are far too few to draw definitive statistical conclusions, they provide useful historical context and reinforce the importance of viewing today’s election cycle within a broader historical framework rather than through the lens of a single political narrative.

Looking ahead to the 2026 midterm elections, the historical record offers a useful framework rather than a forecast. Current polling and historical midterm patterns suggest that Democrats have a reasonable probability of regaining control of the House of Representatives and remain competitive in their effort to regain the Senate. Such an outcome would be consistent with each of the three previous postwar midterm elections that began with unified Republican control of the White House and both chambers of Congress, all of which resulted in Republicans losing control of at least one chamber. If history is any guide, however, investors should focus less on which party ultimately controls Congress and more on the likelihood that the election will reduce uncertainty surrounding the future policy environment. While shifts in congressional control may influence the legislative agenda, the broader historical evidence suggests that markets have generally responded more favorably to the restoration of political clarity than to any particular partisan outcome.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

The Supreme Court’s decision to expand presidential authority over the leadership of independent federal agencies will undoubtedly be debated as a constitutional and political milestone. For investors, however, the more interesting question is economic. The ruling changes not simply who governs, but how government is likely to govern, and in doing so may alter the way markets price risk.

Every financial asset is ultimately valued as the present value of future cash flows discounted for risk. Investors traditionally think of that discount rate as reflecting the risk-free rate, expected inflation, credit risk, and broader macroeconomic uncertainty. Yet there is another component that receives far less attention: the stability of the institutions that govern economic activity.

For nearly a century, the United States deliberately delegated significant portions of economic policymaking to independent agencies whose leadership was insulated from day-to-day political pressures. Whether overseeing financial markets, labor relations, competition policy, communications, or consumer protection, these agencies were designed to provide institutional continuity across presidential administrations. The objective was not to remove politics entirely, but to ensure that important regulatory frameworks evolved gradually rather than changing abruptly with each election.

The Court’s ruling shifts that balance. By expanding presidential authority over agency leadership, future administrations will likely have greater influence over the direction and priorities of regulatory bodies. Supporters argue that this restores democratic accountability by ensuring that executive agencies ultimately answer to an elected president rather than unelected officials. Critics contend that it weakens the institutional independence necessary for consistent long-term policymaking.

From an economic perspective, both arguments have merit.

Greater presidential control may improve coordination across the executive branch, reduce bureaucratic inertia, and allow policymakers to respond more quickly to changing economic conditions. Democratically accountable institutions are often more responsive to voters, and greater flexibility may produce better policy outcomes in periods of rapid technological or geopolitical change.

The tradeoff is that regulation itself may become more cyclical than structural. The issue is not whether future administrations choose more regulation or less regulation. Elections will continue to determine those outcomes. Rather, the question is whether regulatory priorities become less predictable as agency leadership changes more frequently and policy increasingly reflects the shorter rhythm of election cycles.

That distinction matters because uncertainty carries economic costs independent of the policies themselves. Businesses making investments with expected lives measured in decades rely on reasonably stable regulatory frameworks when estimating future cash flows and evaluating capital projects. When the future path of regulation becomes less certain, firms often delay irreversible investments, place greater emphasis on shorter-payback projects, or demand higher expected returns before committing capital.

Financial markets are generally capable of adapting to almost any stable regulatory environment. What markets find more difficult to price is uncertainty regarding how frequently the rules governing investment may change. As a result, investors may increasingly demand compensation not for regulation itself, but for uncertainty surrounding the regulatory environment.

One way to think about this is as an institutional risk premium. Just as investors require compensation for inflation risk, credit risk, liquidity risk, and geopolitical risk, they may also require additional compensation when the long-term stability of policymaking institutions becomes less certain. Such a premium need not be large to matter. Even modest increases in required returns raise the cost of capital, increase investment hurdle rates, and reduce the present value of long-duration assets.

Importantly, this should not be interpreted as an argument against the Court’s decision. A more democratically accountable executive may ultimately produce better policy and stronger economic outcomes over time. Likewise, greater presidential oversight could improve government efficiency and reduce regulatory drift. Those potential benefits are real and deserve consideration.

For investors, however, this weeks ruling is significant for a different reason. It suggests that the United States may be moving away from a governance model in which many important economic decisions were intentionally buffered from electoral cycles and toward one in which regulatory policy is more directly shaped by changing political leadership.

Markets do not require governments to adopt any particular policy preference. They require confidence that the institutional framework within which capital is committed will remain sufficiently stable to evaluate long-term returns. Whether the Court’s decision ultimately proves economically beneficial or not, it introduces a new variable that investors may increasingly need to consider. Over time, institutional stability itself may become a more important component of the discount rate through an institutional risk premium that reflects not the level of regulation, but the uncertainty surrounding its future path.

Ardavan Mobasheri

Chief Economist

A day shy of the tenth anniversary of Britain’s vote to leave the European Union, its latest prime ministerial resignation looked, at first, like another Westminster personnel drama. But the deeper story is economic. Since the Brexit referendum of June 23, 2016, Britain has cycled through leaders at a pace that suggests not renewal but frustration: voters and parties keep demanding new management because the promised restoration of growth, control and competence keeps failing to arrive.

The churn is remarkable. Since the 2016 referendum, Britain has been led by David Cameron, Theresa May, Boris Johnson, Liz Truss, Rishi Sunak and Keir Starmer. Cameron resigned immediately after losing the referendum. May was consumed by the mechanics of withdrawal. Johnson won a large majority promising to “get Brexit done,” only to fall amid scandal and exhaustion. Truss lasted 49 days after markets rejected her fiscal experiment. Sunak inherited crisis management and could not prevent Conservative collapse. Starmer then arrived promising stability, competence and growth, but his own resignation less than two years after Labour’s landslide shows how quickly British politics now burns through authority. The issue is not simply that Britain has had weak leaders. It is that each leader has been asked to deliver a post-Brexit renewal that the economy has not supported.

The instability is visible not only in Downing Street but in the composition of Parliament itself. In 2015, before the Brexit vote, British politics still looked recognizably two-party: the Conservatives won 330 seats and Labour 232, while the SNP’s 56-seat surge was mostly confined to Scotland. Today, the Commons is far more fragmented beneath Labour’s headline majority. Labour remains dominant in seat terms, but the Conservatives have been reduced to a shadow of their 2015 position, the Liberal Democrats have revived, the SNP has fallen back, Reform UK has gained a parliamentary foothold, and independents are more visible. That churn matters because it shows how volatile the underlying electoral coalitions have become. Brexit did not simply rearrange Britain’s relationship with Europe; it scrambled the voter map at home, weakening old party loyalties and making governments look powerful one election and exhausted by the next.

The economic backdrop helps explain why the political system has become so unforgiving. Brexit did not create all of Britain’s weaknesses, but it added friction to an economy that already had too little momentum. By mid-2024, UK real GDP per head was still 0.6 percent below its pre-pandemic level even though total real GDP was 2.9 percent higher. That is the central political problem: Britain can grow in aggregate while many voters feel no improvement in living standards. The Office for Budget Responsibility assumes that Brexit will leave both imports and exports 15 percent lower than they would have been inside the EU and reduce long-run productivity by 4 percent. That is not a forecast of immediate collapse; it is a measure of lost capacity. A country can continue growing and still be poorer than it otherwise would have been.

Demographics sharpen the contradiction. Brexit was sold partly as a way to regain control of immigration, but it did not produce a lower-migration economy. It replaced one migration system with another. Before the referendum, EU citizens made up a majority of UK immigration and net migration. Since 2022, EU net migration has been negative, as the post-Brexit system reduced the ability and incentive for EU workers to move to Britain. But non-EU migration then surged under the visa-based system. Overall net migration reached a record 906,000 in the year to June 2023 before falling to 431,000 in 2024. The result left both sides dissatisfied: businesses still needed foreign workers, voters did not see the lower-immigration settlement many had expected, and faster population growth made weak GDP-per-head performance harder to ignore. Britain had taken back formal control, but control did not mean economic ease.

That is why Starmer’s resignation should be read as more than a judgment on one prime minister. Britain keeps changing leaders because it is still searching for a governing formula that can reconcile Brexit’s political promise with its economic consequences. Voters were told that leaving the EU would restore control and unlock a more dynamic national model. Instead, Britain has endured weaker trade intensity, poor productivity prospects, pressure on public services, an unsettled immigration model and repeated experiments in political management. The lesson extends beyond Britain. As we argued in our 2026 Outlook, nationalism, populism and protectionism can be politically powerful because they offer citizens a simple promise: more control, more sovereignty and better economic outcomes. But Britain was an early adopter of these policies, and its experience shows the risk. If countries, including the United States, continue down a similar path, they may find that protection and sovereignty do not automatically translate into stronger growth. Economies can stagnate relative to potential, citizens can become more dissatisfied with their leaders, and that dissatisfaction can feed the next round of political instability. Britain’s revolving door at Downing Street may therefore be less an outlier than a warning.

Ardavan Mobasheri

Chief Economist

As late as February, monthly revisions to the establishment survey (a.k.a. nonfarm payrolls) were consistently coming in weaker than the initial reports throughout 2025. Recently however, that trend appears to have reversed somewhat, with revisions resulting in a cumulative upward adjustment of 66,000 jobs through the first four months of the year. The Job Openings and Labor Turnover Survey (JOLTS) has also shown improvement, with the latest report indicating that unfilled job openings have increased by a healthy 1.1 million positions since last December and are roughly 600,000 higher than they were at this time last year. Weekly data likewise point to a very stable labor market, with initial unemployment claims only slightly higher than at the end of 2025 and continuing claims modestly lower than where they finished the year.

So, are these developments evidence of a turnaround in the labor market? We do not think so. Several factors may be at work that could prove temporary in nature.

First are the immediate effects of the OBBB (One Big Beautiful Bill). The immediate expensing of new machinery, equipment, and even R&D expenditures is likely front-loading hiring and investment decisions by firms. Meanwhile, the elimination of taxes on overtime and tips may be making work in the travel, leisure, and restaurant industries more attractive, thereby making it easier for employers to fill lower-wage hourly positions.

Second, geopolitical developments and the conflict in the Middle East may be placing additional demands on the military supply chain, positively affecting defense-related contracting activity and hours worked. At the same time, higher oil prices are likely stimulating activity within the energy sector and throughout its supply chain.

Finally, preparations for and the lead-up to the FIFA World Cup are likely providing a temporary boost to the travel and leisure industries, further reinforcing the positive effects from the tax treatment of tips and overtime discussed above.

In addition, we are seeing some important divergences in the monthly employment surveys conducted by the Department of Labor. The monthly Employment Situation Report is derived from two separate surveys: the establishment survey, which produces the widely cited nonfarm payrolls figure discussed above, and the household survey, which measures the employment status of individuals. While the establishment survey measures the number of payroll jobs, the household survey measures the employment status of individuals and provides a broader view of labor market conditions, including labor force participation, unemployment, and the number of people outside the labor force. On that basis, the household survey tells a less favorable story than the headline payroll numbers. Compared with May 2025, the civilian labor force is down by 414,000, the number of employed individuals is down by 473,000, the number of unemployed persons is up by 59,000, and the number of people not in the labor force has increased by more than 2.0 million. In addition, the number of people outside the labor force who currently want a job has risen by 179,000 over the same period. Taken together, these figures suggest that the labor market may be less robust than the nonfarm payroll data alone would imply.

A particularly concerning subcomponent of the household survey is the number of people usually employed full-time. Full-time employment has deteriorated meaningfully over the past year, falling by approximately 600,000 individuals. More troubling, however, is the longer-term trend. The three-year change in full-time employment has now turned negative, meaning there are fewer people employed full-time today than there were three years ago (see Exhibit below). Such an outcome is relatively rare outside periods of significant economic weakness and suggests that the deterioration in labor market conditions may be broader than the headline payroll figures imply. These data point not only to a slowing labor market, but potentially to recessionary conditions emerging beneath the surface.

Taken together, we believe the recent improvement in labor market indicators should be viewed with caution. While payroll revisions, job openings, and weekly claims data have stabilized or improved modestly, much of that strength may be attributable to temporary factors that are unlikely to provide a lasting foundation for employment growth. At the same time, the household survey continues to point toward weakening labor force participation, softer employment growth, and a decline in full-time employment that has now extended beyond a typical cyclical slowdown. As these temporary supports begin to fade, the underlying condition of the labor market should become more apparent. For now, we remain skeptical that the recent data represent the beginning of a sustained labor market reacceleration and continue to view the balance of evidence as more consistent with the early stages of an economic downturn than with the beginning of a new hiring cycle.

There is also a longer-term structural issue that warrants consideration. While the deterioration in the household survey may reflect cyclical weakness in the labor market, demographic trends are becoming an increasingly important part of the employment story. Growth in the U.S. labor force has slowed markedly in recent years as the population ages, fertility rates remain below replacement levels, and labor force participation among older cohorts continues to decline. While the United States is not yet facing the outright population contraction experienced by Japan, nor the degree of demographic stagnation now confronting parts of Europe, it is beginning to encounter many of the same challenges associated with a slower-growing workforce. As a result, some portion of the recent weakness in labor force growth may be structural rather than cyclical. We intend to explore these demographic trends in greater detail in a future commentary, as they are likely to have important implications not only for employment growth, but also for economic growth, inflation, interest rates, and long-term investment returns.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

Statistical polling rests on a simple premise: you do not need to observe the entire population to form a reliable estimate, provided the sample is well designed and appropriately weighted. The soup bowl analogy captures the intuition: if the pot is well stirred, a single ladle can be representative of the whole.

The monthly employment report is constructed in that spirit, and the speed is genuinely striking. In an economy with roughly 165 million people working and millions of businesses operating, a relatively small group of statisticians and economists can still deliver a credible first read on labor market conditions shortly after month end. That speed is possible because the first release is not a full census in real time, but a large, carefully structured sample designed to be representative across industries, firm sizes, and geographies. The establishment survey draws on a universe of roughly 11 million establishments and collects monthly payroll information from roughly 120,000 businesses and government agencies representing hundreds of thousands of worksites, covering roughly one third of all nonfarm payroll employment.

Revisions fit naturally into this framework. After the initial release, the payroll estimate is revised twice over the next two months as additional survey responses arrive and late reports replace imputed values. The first print is therefore best understood as a timely estimate rather than a final count. The larger reset comes with the annual benchmark revision. Each year, payroll employment levels are re-anchored to more comprehensive administrative records from the Quarterly Census of Employment and Wages, which is based on unemployment insurance tax data and is much closer to a census of employers. Those benchmark adjustments can be modest, leaving the trend largely intact, or they can be large enough to materially change how we interpret the prior year’s job growth.

That context matters because the January 2026 release delivered not only the latest monthly reading, but also the full benchmarked history that reframes 2025. The headline details were straightforward. Nonfarm payrolls increased by 130,000 in January and the unemployment rate was essentially unchanged at 4.3%. Gains were concentrated in health care, social assistance, and construction, while federal government and financial activities declined. On its own, that is consistent with an economy that is still adding jobs but doing so with a narrower set of engines than earlier in the cycle.

The more important development was what the revisions revealed about the underlying trajectory. In our June commentary, we argued that the labor market was weaker than the contemporaneous headlines suggested, with the apparent resilience increasingly dependent on a shrinking set of sectors and an ongoing deterioration in breadth. In December, we returned to the same theme, noting that the pattern of revisions and the slowing in trend measures were more consistent with cooling conditions than with a stable re acceleration. The benchmarked data now strengthens that case by showing that 2025 was softer, and in some months meaningfully softer, than the initial estimates implied.

Exhibit 1 is the clearest way to see this. Across 2025, the revision process did not merely add noise around the initial estimates, it introduced a persistent directional bias. Month after month, the initial estimate was marked down through the first and second revisions, and the annual benchmark then reinforced the same direction by lowering the level of payroll employment. This is not a story of one or two idiosyncratic months. It is a broad-based pattern of downward drift.

The cumulative arithmetic is the point. Summing the initial monthly reports for 2025 yields roughly 1.2 million jobs. Summing the final benchmarked series yields roughly 0.2 million jobs. The implied adjustment is about negative 830,000 relative to the initial reporting, a magnitude large enough to change the narrative of the year from modest expansion to near stall speed.

This is why we continue to emphasize process over print. A single employment report, especially the first estimate, is best treated as a representative scoop that gives a timely read on direction and momentum. When revisions are consistently one sided, and when the benchmark reset materially lowers the level and the annual change, it is a signal that the economy’s job creating impulse was weaker than it appeared in real time. Put differently, the pot may not have changed, but the measurement has, and the updated measurement points to a cooler labor market backdrop than the initial 2025 headlines conveyed.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

The White House published its latest National Security Strategy (NSS) last Thursday, marking the third such document in the past decade and offering a new articulation of US strategic priorities. Since the enactment of the Goldwater Nichols Act of 1986, every US administration has been required to produce an NSS outlining the nation’s overarching defense, foreign policy, and security goals. Although each strategy reflects the worldview of the administration that authors it, the NSS has become a central mechanism for communicating long term national intent to domestic agencies and foreign partners. Beyond its explicit security aims, the NSS shapes expectations about US engagement in global affairs, spending priorities, technological investment, geopolitical risk, and the regulatory environment. As a forward-looking statement of strategic posture, it can influence global capital markets by affecting perceptions of geopolitical stability, industrial policy, and the broader climate for private investment.

An illustration of how these strategic perspectives evolve is seen in changing references to China across NSS documents. Beginning with the Clinton administration, China was described mainly in positive economic terms, emphasizing trade, market integration, and the belief that engagement would promote stability. This shifted in the 2017 NSS, which for the first time identified China as a strategic competitor and highlighted its military modernization and assertive regional behavior as challenges to US interests. The 2022 NSS reinforced this view, framing China as the most consequential geopolitical challenge and underscoring competition across military, technological, and economic dimensions. The 2025 NSS is notable because it departs from the 2017 framing produced under the same president, returning to a predominantly economic description focused on trade, industrial capacity, and supply chain security. These shifts show how the NSS can reshape expectations about long term strategic risk and global economic orientation.

Recent NSS documents also reflect broader inconsistency in US strategic posture. The 2017 NSS, despite labeling China and Russia as strategic competitors, sent mixed signals about the depth of US global commitments and the reliability of alliance structures. The 2022 NSS represented a clear reversal, reaffirming the importance of alliances and expanding competition to military, technological, and ideological domains. The 2025 NSS then introduced another shift, narrowing its focus to domestic industrial strength, trade balances, and economic resilience. For investors, these oscillations highlight how US strategy has become increasingly tied to political turnover rather than a stable bipartisan consensus. This complicates long term geopolitical assessment, requiring markets to evaluate not only stated priorities but also their durability across administrations.

In addition to its revised treatment of China, the 2025 NSS introduces other departures that narrow the scope of US engagement. It places strong emphasis on immigration as a security issue, linking border control, large scale migration flows, and pressures at the southern border to broader national stability. It also adopts a more adversarial tone toward Europe, describing demographic and political strains that raise questions about Europe’s reliability as a security partner. At the same time, the document redirects attention toward the Western Hemisphere, prioritizing regional stability, secure supply chains, and reduced exposure to distant geopolitical commitments. These elements collectively depict a strategy grounded in domestic capacity, regional alignment, and economic sovereignty.

The strategic orientation reflected in the 2025 NSS has several implications for markets. Its emphasis on domestic production and regional supply chains reinforces existing deglobalization trends, suggesting an operating environment more focused on reshoring and reduced reliance on global production networks, implying more legislation, more regulation, and more deficit spending. More restrictive immigration policies may slow labor force growth, affecting a key driver of US economic expansion and influencing wages, productivity, and long term potential GDP growth, likely leading to higher wage growth and compressed margins. The strategy’s more confrontational posture toward Europe adds uncertainty to transatlantic trade and capital flows, with potential implications for regulatory alignment and investment flows, likely resulting in more regulation, restrictive trade, higher tariffs, and slower flows of investment capital in both directions. Meanwhile, even though the 2025 NSS frames China mainly in economic terms, uncertainty surrounding bilateral trade, technology investment, and market access remains elevated. For investors, these developments point to a landscape in which geopolitical considerations increasingly shape capital allocation and global economic activity.

Capital and financial markets do not like uncertainty, and risk premia has historically risen and fallen with the market’s comfort or discomfort regarding the geopolitical landscape. The latest NSS does little to alleviate existing uncertainties and in many respects keeps them elevated. While its inward looking orientation and focus on the Western Hemisphere could create positive implications for certain domestic industries and regional partners, the broader regulatory and spending pressures implied by the strategy may offset some of those potential benefits. With midterm elections approaching in 2026, the policy direction and strategic posture of the United States may become even less predictable, suggesting that the element of uncertainty facing investors could rise further in the year ahead.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist

In his February 1982 speech, when announcing the establishment of the “Private Sector Survey on Cost Control” (PSSCC), better known as the Grace Commission, President Ronald Reagan commented:

“I expect them to roll up their sleeves and search out waste and inefficiency wherever it’s to be found in the Federal establishment… Special emphasis will be placed on eliminating overlap, red tape, and duplication; identifying nonessential administrative activities; and increasing management effectiveness.”

A little over a decade later, in March 1993, when announcing the establishment of the “National Partnership for Reinventing Government” (NPR), President Bill Clinton stated:

“Our goal is to make the entire federal government less expensive and more efficient, and to change the culture of our national bureaucracy away from complacency and entitlement toward initiative and empowerment.”

In February 2010, while announcing the creation of the “National Commission on Fiscal Responsibility and Reform,” more commonly referred to as the Simpson-Bowles Commission, President Barack Obama remarked:

“For far too long, Washington has avoided the tough choices necessary to solve our fiscal problems and they won’t be solved overnight…. I’m confident that the Commission I’m establishing today will build a bipartisan consensus to put America on the path toward fiscal reform and responsibility.”

And finally, in November 2024, while announcing the creation of the “Department of Government Efficiency” (DOGE), the re-elected President-elect Trump said:

“I am pleased to announce that the Great Elon Musk…will lead the Department of Government Efficiency (‘DOGE’). Together, …[Musk and others] will pave the way for my Administration to dismantle government bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal agencies…”

While President Trump’s Department of Government Efficiency (DOGE) succeeded in eliminating thousands of government jobs (a task also accomplished by President Clinton’s NPR), and shutting down many activities, its overall impact on government efficiency and spending is turning out to be minimal at best and cost additive at worst. In fact, over the course of the time Musk spent in Washington expectations of reduced spending by the federal government went from approximately $2 trillion for 2025 immediately following the November elections, to $1 trillion immediately following the January inauguration, to roughly $150 billion during his last month at DOGE, with independent estimates ranging from $5 billion dollars to $35 billion. Of course, these figures represent the benefits side of the equation from an expense perspective, and do not take into account the cost side of the equation in terms of lost revenue collection and reduced and delayed services.

While all the above efforts can be viewed as admirable attempts to move the nation toward a more sustainable fiscal position, they share a common flaw: none has ever established a comprehensive, nonpartisan and broadly accepted definition of what constitutes waste, nor a consistent method for quantifying it. Without such clarity, each initiative ends up pursuing its own interpretation, producing uneven estimates, unrealistic expectations and ultimately disappointing outcomes. At a deeper level, federal reform efforts face the immovable reality that roughly three quarters of the federal budget is consumed by mandatory programs and interest payments, leaving only a relatively small portion of spending realistically subject to cuts. Achieving meaningful deficit reduction through efficiency alone is therefore structurally impossible, and raising taxes to close the gap remains deeply unpopular with the electorate, severely constraining the range of politically viable options.

In the meantime, and in line with the latest projections from the Congressional Budget Office, we expect federal spending as a share of GDP to continue rising and surpassing 24 percent by 2030, while revenues remain stable at roughly 18 percent. This leaves a persistent gap of about 6 percent of GDP that will need to be financed through the capital markets, with a significant share falling on domestic financial institutions, and indirectly through further expansion of the balance sheet of the Federal Reserve well past 2030.

The recent confirmation from Scott Kupor, Director of the Office of Personnel Management, that DOGE has effectively ceased to exist is simply the latest reminder that these initiatives, across administrations, parties and decades, consistently fall short not because of a lack of ambition, but because they target the margins rather than the core drivers of federal finances. President Reagan’s initiative was by no means the first attempt, and President Trump’s will almost certainly not be the last.

As always, stay tuned.

Ardavan Mobasheri

Chief Economist