Cooling Consumer Spending, Strong Jobs Retention, and Mixed Inflation Data Shape Fed Outlook Ahead of December Meeting

Weekly Economic Review: Dec 5, 2025

This week’s economic data includes: (1) PCE (Personal Consumption Expenditure) Price Index & Personal Income and Outlays, (2) ISM (Institute of Supply Management)

Report on Manufacturing, (3) ISM Report on Business Services Sectors, (4) ADP National Employment Report, (5) Challenger Job Cuts Report, and (6) weekly initial jobless and continuing claims.

KEY SUMMARY:

Delayed September data shows headline PCE inflation steady at 2.8% while real income and spending slowed, suggesting persistent price pressures but weakening demand—likely reinforcing the Fed’s cautious stance on rate cuts as it balances inflation control with signs of cooling consumer activity.

Inflation Trends: The headline PCE Price Index rose 0.3% month-over-month in September, matching August’s pace and market expectations. This increase was driven by higher prices for nondurable goods—especially gasoline (+3.6%), clothing (+0.8%), and food—as well as services like airfare and healthcare. Goods prices surged 0.5%, the strongest since January, while services price increases slowed to 0.2% from 0.3% in August. On a year-over-year basis, headline PCE inflation edged up to 2.8%, supported by notable gains in categories such as used vehicles (+5.4%), beef (+14.7%), and financial services (+6.6%). Core PCE inflation, the Fed’s preferred gauge, rose 0.2% month-over-month and eased slightly to 2.8% annually, reflecting softer housing and financial services costs.

Income and Savings: Personal income grew 0.4% in September, consistent with August and above expectations, driven by private wages, employer contributions, and dividend income. Year-over-year, income rose 5.2%, while disposable income increased 0.3% monthly and 4.8% annually. Real disposable income barely advanced (+0.1%) and slowed to 1.9% year-over-year. The personal savings rate held steady at 4.7%, signaling limited improvement in household financial buffers despite income gains over the course of the year.

Consumer Spending: Spending growth moderated to 0.3% in September after three months of stronger gains, aligning with expectations. Services spending rose 0.4%, led by housing, healthcare, and airfare, while goods spending stagnated amid price pressures and declines in motor vehicle and apparel purchases. On an annual basis, consumer spending increased 5.0%, the weakest since January 2024. Real spending was flat month-over-month and slowed to 2.1% year-over-year, reflecting diminished momentum in inflation-adjusted consumption.

Manufacturing activity contracted for the ninth straight month as the ISM Index fell to 48.2, signaling persistent demand weakness and cost pressures despite a modest rebound in production.

The ISM Manufacturing Index fell to 48.2 in November from 48.7 in October, marking its ninth consecutive month in contraction and the sharpest decline in four months, driven by weaker new orders, supplier deliveries, and employment. While manufacturing represents about 10% of the economy, and an index below 50 generally indicates a contracting economic activity level, historically an index reading above 42.3 for an extended period is consistent with overall economic expansion.  So at 48.2, the index is still signaling broader economic growth. Demand softened with new orders and backlogs dropping amid tariff uncertainty, although export orders and inventories offered slight offsets. Production improved to expansion territory, but employment continued to contract for the tenth straight month. Input trends were mixed: inventories and imports contracted at a slower pace, supplier deliveries accelerated, and raw material prices rose for the 14th consecutive month, underscoring persistent cost pressures despite overall sector weakness.

Services sector growth accelerated in November as the ISM Services Index rose to 52.6, signaling continued expansion driven by stronger business activity and backlogs, even as employment remained weak and price pressures eased.

The ISM Services Index rose to 52.6 in November from 52.4 in October, marking the sixth consecutive month of expansion and signaling resilience in the services sector, which accounts for 70% of the U.S. economy. Growth was supported by stronger business activity (54.5), longer supplier delivery times, and rising backlogs, while new orders slowed but remained in expansion territory. Prices paid continued their long upward trend but eased, suggesting softer inflation pressures, and employment contracted for the sixth straight month, although at a slower pace. Twelve industries expanded, including retail trade and hospitality.  In contrast with ongoing weakness in manufacturing, this indicates that services remain a key driver of overall economic growth despite labor and cost challenges.

Private-sector payrolls fell by 32,000 in November – the largest drop since March 2023 – driven by steep small-business losses and broad industry declines, signaling accelerating labor market weakness and easing wage pressures ahead of the FOMC meeting.

According to ADP’s report, private-sector employment fell by 32,000 in November, marking the largest decline since March 2023 and sharply missing expectations for a modest gain. The drop was driven by small businesses shedding 120,000 jobs—the steepest one-month loss since May 2020—while medium and large firms added jobs, partially offsetting the decline. Industry losses were concentrated in professional and business services, information, and manufacturing, while education, health services, and leisure sectors posted gains. This marks the fourth overall decline in six months, with the three-month average turning negative, signaling accelerating labor market weakness ahead of the FOMC meeting. Meanwhile, pay growth continued to cool, with job changers seeing a 6.3% increase – the lowest since early 2021 – and job stayers at 4.4%, reinforcing signs of easing wage pressures.

Job cuts announced in November totaled 71,321 – the highest for the month in three years – driven by telecom and tech layoffs, while hiring plans plunged 35% year-to-date to the lowest level since 2010, signaling mounting labor market caution.

Companies announced 71,321 job cuts in November, up 24% from a year ago but down sharply from October’s spike, marking the highest November total in three years. Layoffs were concentrated in telecommunications—largely due to Verizon—and technology, driven by restructuring and challenging market conditions. Year-to-date hiring plans fell 35% to 497,151, the lowest since 2010, with seasonal hiring at its weakest level since 2012.  No new holiday hiring plans were announced in November, underscoring a cautious labor outlook amid economic uncertainty.

Jobless claims fell to 191,000 – the lowest since September 2022 – signaling strong job retention, though continuing claims point to slower reemployment ahead of the FOMC meeting.

Initial jobless claims fell sharply by 27,000 to 191,000 for the week ending November 29—the lowest level since September 2022 and well below expectations—although holiday-related distortions may have influenced the drop. The four-week average declined to 214,750, reinforcing a trend of employers holding onto workers. Continuing claims eased slightly to 1.939 million, with the four-week average at 1.945 million, suggesting that while layoffs remain low, workers seeking a change are taking longer to find new jobs.  This is consistent with underlying softness in labor-market conditions ahead of the FOMC meeting.

Stocks closed near record highs as easing inflation and soft spending boosted expectations for a December Fed rate cut, while Treasury yields steepened and markets priced in multiple cuts through 2027 to support growth.

Equity markets ended the week near record highs, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all posting gains as investors reacted to softer consumer spending, easing inflation, and strong retail earnings—factors reinforcing expectations of a Fed rate cut at the upcoming meeting. Weekly performance was positive across major indices, led by the Nasdaq (+0.92%, +22.10% YTD) and supported by the Russell 2000 (+0.84%, +13.06% YTD), while the S&P 500 and DJIA also advanced.

In the Treasury market, yields showed a steeper curve with short-term rates declining and long-term rates rising, driven by weaker economic data, anticipated Bank of Japan policy shifts, and increased corporate debt issuance. Rate cut expectations surged, with markets pricing a 96% probability of a December cut and projecting three additional 25-basis-point reductions through early 2027, which would lower the federal funds rate upper bound to 3.00% from the current 4.00%, signaling a dovish outlook amid efforts to support growth.

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DETAILED ANALYSIS:

PCE Price Index & Personal Income and Outlays – September Update: 

(Originally scheduled for release on October 31 but delayed due to the government shutdown)

PCE Price Index: The Bureau of Economic Analysis reported that the headline PCE price index rose 0.3% month-over-month in September, in line with market expectations and following a similar increase in August. The monthly gain was driven primarily by nondurable goods—including gasoline and other energy goods, clothing and footwear, and food and beverages—as well as services such as airfare, food service and accommodation, and healthcare.

• Goods prices increased 0.5%, the highest level since January, led by furniture and furnishings (+0.4%) and clothing and footwear (+0.8%), likely related to tariffs. Gasoline and other energy products surged 3.6%.
• Services prices slowed to 0.2% in September from 0.3% in August, mainly due to lower housing and financial services costs.

On a year-over-year basis, headline PCE inflation rose to 2.8%, up from 2.7% in August and matching expectations. The annual increase was driven by:

• Services prices: +3.4% (slightly down from August)
• Nondurable goods: +1.7%
• Goods categories: used vehicles (+5.4%), furniture and furnishings (+3.0%), tools/hardware/supplies (+6.2%), beef (+14.7%), tobacco (+6.9%), sugar and sweets (+6.7%)
• Services categories: airfare (+6.5%), financial services (+6.6%), housing and utilities (+4.0%)

The Core PCE Index—excluding food and energy and considered the Federal Reserve’s preferred inflation gauge—rose 0.2% month-over-month, unchanged from August and in line with expectations. On an annual basis, Core PCE inflation eased to 2.8% from 2.9% in August. The slowdown was primarily due to declines in services and durable goods prices, with housing and financial services costs continuing to soften.

Personal Income: Personal income increased 0.4% month-over-month in September, matching August’s pace and exceeding expectations of 0.3%. Growth was driven by:

• Private wages and salaries
• Employer contributions to pension and insurance funds
• Dividend income

Year-over-year, personal income rose 5.2%, consistent with the prior month.

• Disposable personal income: +0.3% (down from 0.4% in August); annual increase of 4.8%
• Real disposable income (inflation-adjusted): +0.1% month-over-month; +1.9% year-over-year (down from 2.0% in August)
• Personal savings rate: unchanged at 4.7%

Personal Spending: Consumer spending slowed to 0.3% month-over-month in September, down from the robust 0.5% pace of the prior three months and in line with expectations.

• Services purchases: +0.4%
• Nondurable goods purchases: +0.4%
• Goods spending: declined to its lowest level since May, likely due to higher goods prices (+0.5%, the highest since January). Spending on motor vehicles, recreational goods, and clothing/footwear fell, suggesting resistance to price hikes after a 0.8% increase in apparel prices. Overall outlays on goods were flat.

The increase in services spending was led by housing and utilities, healthcare, financial services and insurance, airfare, and motor vehicle leasing. However, spending on hotel/motel rooms and recreation services declined.

On a year-over-year basis, consumer spending rose 5.0%, marking the weakest annual gain since January 2024.

• Real consumer spending (inflation-adjusted): flat month-over-month (down from 0.2% in August, revised from 0.4%) and below expectations of 0.1%. Annual growth slowed to 2.1%, down from 2.6% in August – the lowest since January 2024.

ISM Report on Manufacturing – November Update: 

The ISM reported November manufacturing sector activity showing continued weakness.
The ISM Manufacturing Index registered 48.2 in November, down from 48.7 in October and 48.4 a year ago. This marks the sharpest decline in four months, driven by pullbacks in new orders, supplier deliveries, and employment. The index has remained below 50—signaling contraction—for nine consecutive months. While manufacturing accounts for roughly 10% of the economy, the index still indicates overall economic expansion for the 62nd straight month, as readings above 42.3 generally reflect growth in the broader economy.

Demand indicators remained soft.
New orders fell at the fastest pace since July, and order backlogs dropped the most in seven months, largely due to tariff uncertainty causing customers to delay purchases. Gains in new export orders and higher customer inventories partially offset these declines.

Output indicators were mixed.
The production index rose into expansion territory – the strongest in four months – helped by October’s backlog improvement. Conversely, the employment index fell again, remaining in contraction for the tenth straight month, as firms continue to reduce staff amid uncertain demand.

Input components showed varied trends.

• Inventories: Contracted at a slower pace but stayed negative for seven months.
• Supplier Deliveries: Declined, signaling faster deliveries after three months of delays.
• Prices: Increased at a faster rate, marking the 14th consecutive monthly rise in raw material costs.
• Imports: Contracted at a slower pace, remaining negative for eight months.

ISM Report on Business Services Sectors – November Update:

The ISM released its November report on service-sector activity, which represents about 70% of the private economy by employment and GDP. The ISM Services Index rose to 52.6 in November from 52.4 in October, beating expectations of 52.0. A reading above 50 signals growth, and November marked the sixth straight month of expansion, driven by stronger business activity and longer supplier delivery times. Twelve industries grew—led by retail trade, entertainment & recreation, and accommodation & food services—while five contracted, including construction and real estate.

• Business Activity: Increased to 54.5 from 54.3, the highest in three months.
• New Orders: Slowed to 52.9 from 56.2 but remained in expansion for 33 of the past 35 months.
• Prices Paid: Rose for the 102nd consecutive month but eased to 65.4 from 70.0, signaling softer inflation pressures.
• Employment: Contracted for the sixth straight month at 48.9, though the pace of decline is slowing.
• Backlogs & Inventories: Backlogs rose sharply to 49.1 (largest jump since June 2022), while inventories returned to expansion at 53.4.
• Supplier Deliveries: Lengthened to 54.1, the highest since Oct 2024, partly due to air traffic disruptions and tariff changes.

Overall, continued growth in business activity, new orders, and backlogs suggests an emerging recovery in services—contrasting with weakness in manufacturing.

ADP National Employment Report – November Update:

ADP, the largest U.S. payroll provider, released its November Employment Report last Wednesday. This monthly report measures private-sector job growth, offering data on total employment as well as breakdowns by industry, region, and company size, based on payroll information from over 26 million employees.

Private-sector payrolls fell by 32,000 in November, following an upwardly revised increase of 47,000 in October (previously 42,000) and coming in well below market expectations of a 10,000 gain. This marks the largest decline since March 2023. Private payrolls have now declined four times in the past six months, and the three-month moving average shows a 5,000 drop—adding to concerns about a faster deterioration in the labor market ahead of next week’s FOMC meeting. This report carries added significance because the official November jobs report will be released after the FOMC meeting, making private payroll data a key input and one of the few available for policymakers.

The November decline was broad-based, led by a sharp pullback among small businesses. Companies with fewer than 50 employees shed 120,000 jobs – the largest one-month drop since May 2020 – while medium-sized firms added 51,000 jobs and large businesses added 39,000. By industry, losses were concentrated in professional and business services (-26,000), information (-20,000), and manufacturing (-18,000), partially offset by gains in education and health services (+33,000) and leisure and hospitality (+13,000).

Year-over-year pay growth continued to cool. Job changers saw a 6.3% pay increase, the lowest since February 2021 and down from 6.7% in October. Those who stayed in their roles experienced 4.4% growth, slightly below October’s 4.5%.

Challenger Job Cuts Report – November Update:

The Challenger Job Cuts Report, published monthly by outplacement firm Challenger, Gray & Christmas, tracks announced corporate layoffs and hiring plans in the U.S. that will be implemented over time.

In November, companies announced 71,321 job cuts, up 24% from 57,727 in the same month last year, but down 53% from 153,074 in October. This marks the highest November total in three years, driven primarily by the telecommunications sector (largely due to Verizon Communications) and the technology sector. The main reasons cited for these layoffs were restructuring and market and economic conditions.

Year-to-date through November, hiring plans have fallen 35% to 497,151, compared with 761,954 at this point in 2024 – the lowest total since 2010. Of that figure, 372,520 represent seasonal hiring plans, the lowest since 2012. Notably, no new holiday hiring plans were announced in November.

Jobless Claims – Week Ending November 29:

The Labor Department reported that initial jobless claims fell by 27,000 to 191,000 for the week ending November 29, down from 218,000 the prior week (revised from 216,000). This is the lowest level since September 24, 2022 (189,000) and came in below market expectations of 220,000. The holiday-shortened week likely introduced distortions around Thanksgiving, but the trend still reflects businesses holding on to their employees. The four-week moving average declined to 214,750, down 9,500 from the previous week.

Continuing claims, which track the total number of individuals receiving unemployment benefits, slipped to 1.939 million for the week ending November 22, down 4,000 from 1.943 million (revised from 1.960 million) the prior week—below expectations of 1.963 million. The four-week moving average eased to 1.945 million from 1.952 million. This suggests workers are taking longer to find new jobs, signaling soft labor-market conditions ahead of next week’s FOMC meeting.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets ended the week near record highs, with the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq all posting gains. These advances were driven by a mix of current and delayed economic data—such as soft consumer spending and easing inflation—which reinforced investor expectations that the Federal Reserve will cut interest rates at its next meeting. Strong corporate earnings from select retail stocks also contributed to the positive sentiment. Markets anticipate that lower rates and potential tax cuts will help revive sluggish economic growth and offset persistent concerns about a weakening labor market and uncertainty surrounding tariff policies.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +0.92% (weekly) & +22.10% (YTD), closing at 23,578
• S&P 500: +0.31% (weekly) & +16.81% (YTD), ending at 6,870
• Dow Jones Industrial Average: +0.50% (weekly) & +12.72% (YTD), closing at 47,955
• Russell 2000: +0.84% (weekly) & +13.06% (YTD), ending at 2,521

Treasury Market Update

Treasury yields showed a mixed pattern and a steeper curve, with short-term yields (under one year) declining and longer-term yields rising:

• 2-year yield: 3.56% (+0.09%)
• 5-year yield: 3.72% (+0.13%)
• 10-year yield: 4.14% (+012%)

The movement was driven by several factors:

• Softer-than-expected consumer spending and inflation data, which strengthened expectations for a Fed rate cut at the upcoming meeting.
• Anticipation of potential future rate hikes by the Bank of Japan, prompting some capital flows from U.S. Treasuries to Japanese government bonds.
• Increased corporate debt issuance.

Rate Cut Expectations

Markets have increased the probability of a rate cut at the December 9–10 FOMC meeting, with odds rising to 96%, up from 83% last week. Looking further ahead to 2026 and 2027, markets have fully priced in three 25-basis-point cuts—expected in April and September 2026 and March 2027. These adjustments would lower the federal funds rate upper bound to 3.00%, down from the current 4.00%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key Scheduled releases include:

• 12/9 (Tuesday):
  • NFIB Small Business Optimism (November)
  • JOLTS Job Openings (October)
• 12/10 (Wednesday):
  • FOMC Rate Decision
• 12/11 (Thursday):
  • Weekly Initial and Continuing Jobless Claims

For a visual representation of this week’s economic review, you can view or download the slide deck here:12.05.2025 CBC Weekly Economic Update Slides8.2025 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.