September employment surprised to the upside

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Although the September employment report surprised to the upside, the overall stance of the US labor market remains weak, something that was underscored by the third consecutive increase in the rate of unemployment, from 4.1% in June to 4.4% in September. But the problem with this data point is that we will never know the rate of unemployment for the month of October; and, although we will get delayed information on the rate of unemployment for November, that data is going to come in after the Federal Reserve Federal Open Market Committee (FOMC) meeting ends, which will not be helpful for the Fed’s interest rate decision.

Markets seemed to have concluded, after the initial euphoria on the back of NVIDIA’s results, that the strength in the labor market in September, plus the lack of data releases (or the delay of these releases) for employment in October and November, was enough to definitely upend the market’s expectations for another rate cut in December. If markets continue to believe this is the case, it will become a fulfilled prophecy, as the Fed typically takes market expectations into consideration. Clearly, Fed officials, except for the most dovish ones, including the latest Donald Trump appointee, Stephen Miran, have been arguing that a December cut was not a sure thing. It seems that they have been successful, so far, in convincing the markets that this time they will pass on cutting rates.

We, on the other hand, believe that even if the September employment number was stronger than expected, the stance of the US labor market is still worrisome. We believe labor market weakness will be evident when the Bureau of Labor Statistics releases the October and November employment numbers. By then, however, the December Fed decision will be in the rear-view mirror, and we will be trying to predict the direction of rates in 2026, which remains far from clear.

Delayed data releases compound economic analysis issues

Monday’s release of the first delayed construction spending report for August had a big surprise: residential construction spending surged by 0.8% during the month. However, when looking at the details of the report, new single family homes construction spending declined by 0.4% while new multifamily construction spending increased by just 0.2%, all month-on-month. That is, the new residential market construction sector was very weak during the month of August, as new single family construction spending represents 45.7% of all residential construction spending while new multifamily construction spending represents only 12.4% of residential construction spending.

Thus, the driver of the strong growth in residential construction spending during the month of August was spending on private residential improvements. This component of residential construction spending accounted for about 42% of all residential construction spending during the month of August.

This component is part of what goes into the calculation of residential investment and has become an important contributor in the recent past, as shown in the graph below.

This private residential improvements component is different from the retail sector’s building materials and garden supply stores, which includes the do-it-yourself component for home renovations. The latter is part of consumption expenditures rather than the investment component of GDP, as is the case for the private residential improvement sector. However, the correlation between these two sectors (private residential improvements and building materials and garden supply) is about 95%.

Since we heard this week that Home Depot, with almost 30% share of this market, missed third-quarter estimates while lowering full-year profit estimates, it is possible that this part of investments also weakened at the end of the third quarter of the year.

Another piece of alternative information from the consumer side comes from the National Retail Federation. This release showed that retail sales in September were very weak, declining by 0.66% on a month-over-month basis. The US Census will release the September retail sales report next week, on November 25, which will probably also show weakness at the end of the third quarter of the year. This information, as well as revisions to previous months, will be used to calculate personal consumption expenditures – a major component of real GDP during the third quarter of the year. Thus, next week we will be focusing on the performance of the control group sales within the retail sales report.

The National Retail Federation also showed that retail sales partially recovered during the month of October, growing by 0.6% month-over-month, which is good news entering the last quarter of the year.

Bottom Line

While September’s employment report came in stronger than expected, the underlying labor market remains fragile amid a steady rise in unemployment. Additionally, October job cuts per the privately-sourced Challenger survey were the highest since the Great Financial Crisis, underscoring the recent weakness. Signs of weakening consumer spending and potentially softer private investments suggest broader economic momentum is slowing as well. Furthermore, the lack of data as of a result of the longest government shutdown resulted in market expectations aligning with the Fed’s recent messaging: The December rate cut is far from certain.

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Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.

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Source: FactSet, data as of 10/17/2025