In our June commentary[1], we highlighted growing concerns about a deteriorating labor market, pointing to the persistent pattern of downward revisions to initially released employment data. At the time, headline figures still appeared resilient, but repeated revisions were already signaling that underlying labor conditions were weaker than first reported. That dynamic has continued to this day, reinforcing our earlier assessment and underscoring that the apparent stability in employment has increasingly relied on preliminary data that is later revised lower as more complete information becomes available.
That uncertainty has been compounded more recently by disruptions to the regular publication of key U.S. economic indicators following the 2025 federal government shutdown. The 43-day lapse in funding interrupted data collection across several federal statistical agencies, creating delays, omissions, and irregular releases for critical labor market reports. Most notably, the household employment survey was not conducted during the shutdown, meaning that no official unemployment rate will be published for October. The most recent available figures show the unemployment rate at 4.4 percent in September 2025, the highest level since 2021, leaving investors and policymakers with an increasingly incomplete and backward-looking view of labor market conditions at a time when they appear to be deteriorating.
In parallel with the gaps and delays in the official data, our proprietary labor market indicator (See Exhibit below) has continued to weaken in a way that is consistent with a broader deterioration in employment conditions. After remaining relatively stable over the prior twelve months, the indicator has now fallen to its lowest level since late 2021, resuming the downtrend that first began in 2023. This recent decline suggests that underlying labor market momentum has been eroding even as headline measures temporarily masked the shift. Importantly, this indicator has a long track record as a leading signal for monetary policy, having consistently turned ahead of changes in the federal funds rate since the early 1990s.
Several underlying factors help explain the recent deterioration in our labor market indicator, each pointing to a broadening slowdown beneath the surface of the headline data.
Taken together, these signals suggest that while the labor market has not yet deteriorated to levels typically associated with a full recession, it is likely as weak as it can be without the broader economy already being in contraction. Employment conditions appear to remain under pressure, reinforced by ongoing softness in hiring, elevated layoffs, and continued downward revisions to prior data. In this environment, the Federal Reserve’s pivot toward prioritizing employment over inflation appears well founded, supporting continued interest rate cuts and looser monetary policy aimed at preventing labor market weakness from becoming more entrenched.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist
Back in June, we discussed the weakening trend in U.S. employment growth, as observed from the consistent downward revisions to the monthly employment reports through May[1]. The July revisions not only continued this trend but also accelerated it meaningfully (see Exhibit 1). In fact, the revisions accompanying the July Employment Situation report from the U.S. Department of Labor were the largest in decades outside of recessionary periods (assuming we are not currently in one). Year-to-date downward revisions are approaching 500,000, nearly half of the initially reported figures.
While the Trump administration blamed the messengers for these weak reports and ultimately dismissed the head messenger, BLS Commissioner Dr. Erika McEntarfer, downward adjustments, especially at turning points in the economic cycle or during downturns (i.e., recessions), are quite normal. There is no question that labor markets are on shaky ground, and further weakening in the coming months is likely as businesses grapple with continued policy uncertainty from Washington.
Policy uncertainty emanating from Washington also had an impact on the July inflation report. While the full impact of tariff policies on inflation will take many more months to assess, their effects are beginning to filter through month-by-month.
Although headline inflation continues to moderate, some pass-through effects from tariffs are starting to appear beneath the surface. As shown in Exhibit 2, headline inflation over the past two years has been dominated by the services sector, which constitutes roughly 60% of the overall Consumer Price Index (CPI). However, over the past several months (beginning in May to be precise), this contribution has been declining. In fact, the contribution of services to consumer inflation (roughly 87% over the past 12 months) is now at its lowest level since May 2023. Goods, including food and energy, which make up the remaining 40% of consumer prices, have begun to play a larger role in driving overall inflation. This is precisely where the impact of tariff policy is most directly observed.
Taken together, neither of these trends provides the Federal Reserve with comfort in its current monetary policy stance. However, we believe that weakening employment trends, likely to continue if not accelerate in the months ahead, have now become the bigger concern for the central bank. This could be the catalyst needed for the Fed to finally resume reducing interest rates at its mid-September Open Market Committee meeting.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist
When it comes to observing economic and financial market volatility and uncertainty, April was as complete of a month as we’ve seen in years. President Trump’s actions and statements to date, as well as the advance notice on Liberation Day, have not only put the markets on notice but the economy as well.
We found out that first-quarter U.S. GDP shrank for the first time in two years, almost entirely due to the widening of the trade balance as businesses and consumers front-loaded their spending ahead of tariff implementations. Job market data continued to come in mixed, inflation data generally came in weaker than expected, and sentiment continued to decline as economic uncertainty spiked.
Exhibit 1: Manufacturing Remains in Recession
Source: ICG Advisors, U.S. Department of Commerce, Bloomberg.
The one area that was impacted by both weaker sentiment and actual activity was manufacturing. We have written about the state of U.S. manufacturing several times over the past year, and while we’ve preferred to see the glass as half full—with some glimmer of hope seen in Fall/Winter 2024—that light at the end of the tunnel remains distant. Our Regional Fed Manufacturing Index (made up of sentiment reports from the New York, Richmond, Kansas City, and Dallas Federal Reserve Banks) deteriorated significantly in April. It’s now at its lowest level since July of last year and firmly in negative territory. This implies much weaker orders for manufactured goods in the coming months, especially outside of Transportation and Defense (Exhibit 1).
Manufacturing remains high on the Trump Administration’s list of priorities, with a clear desire to increase output in the sector. The strategy chosen by the administration has been to increase tariffs and trade restrictions—an approach that contrasts with the prior administration’s focus on subsidies and tax breaks. However, both strategies fail to address the significant headwinds facing the sector: the high cost of capital, lack of available skilled labor, lack of global competitiveness among domestic producers, inadequate infrastructure (including necessary supply chains), and the much higher operating costs faced by those seeking to produce in the United States.
Given the on-again, off-again nature of tariff announcements and the lack of clarity in trade negotiations, it is highly doubtful that business and consumer sentiment will improve meaningfully over the coming months. In fact, recent announcements regarding China may worsen the situation, as companies become more focused on inventory management rather than capital investment—thereby delaying meaningful investment in manufactured goods.
We remain open to changing our minds when the facts on the ground change, but as of now, the possibility of a manufacturing rebound during 2025 seems highly doubtful.
As always, stay tuned.
Ardavan Mobasheri
The statistical data and comparative indices herein have been obtained from Bloomberg and Morningstar. While ICG considers such statistical data reliable, ICG has not independently verified such information nor guarantees or warrants such information as to accuracy or completeness. Indexes are provided for comparative purposes only and may not have any direct or indirect correlation to your investments referenced herein. Comparisons have limitations because indexes may have volatility, investment and other characteristics that differ from funds. Indexes are unmanaged, may include the reinvestment of dividends and may or may not reflect transaction costs, management, or other fees. Indexes other than those used herein may be appropriate and relevant for comparative purposes. Investors cannot directly purchase an index.
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