Four Fed Districts, One Message: Hiring Keeps Cooling

• Services and manufacturing surveys show hiring remained weak in December.

• Labor gains this year continue to fall behind pace.

• The slowdown will maintain pressure on the Fed to support growth.

The labor market showed little sign of improvement in December.

This week brings an important update on the outlook for economic growth. On Friday, the U.S. Bureau of Labor Statistics (BLS) will release its payroll data for December. Wall Street expects an increase of 57,000 jobs. If that happens, it will be a major letdown compared to the typical December gain of 251,000 employees since 2015. It will be an exclamation point on the weakest annual pace of hiring we’ve seen in the last decade…

December is usually one of the best months to find a job. Companies tend to add workers as they prepare for business to ramp up in the new year. But recent Federal Reserve business surveys suggest hiring slowed in December compared to November. If the national data confirms that, it points to a possible economic slowdown. That would strengthen the case for more interest rate cuts next year and support a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Each month, several regional Fed banks survey manufacturing and services firms in their districts to gauge business activity. I focus on the employment and inflation components from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Together, these regions make up about 32% of U.S. GDP. Their surveys offer an early read on national trends, especially since they come out before market‑moving reports like the BLS payrolls.

Today, I’m focusing on employment. Let’s break down the individual components before zooming out to the broader picture.

Starting with the manufacturing surveys…

The chart above shows the sector’s hiring trend over the last seven years. After the pandemic collapse, factory hiring surged. But since then, the numbers have gradually eased. On the right side of the chart, you’ll notice that manufacturing employment has held steady for most of this year. Then, after a brief breakout in July and August, it appears to have slowed into year end.

The services sector fared worse…

Hiring stayed weak, with the gauge in negative territory for the third straight month. Philadelphia was the only district to show a gain, while New York, the largest weighting, was the biggest drag. And it wasn’t just hiring that slipped. Most categories, including general business activity, new orders, and backlogs, also declined.

To get a clearer national picture, I combined the manufacturing and services data into a single gauge—weighted 80% services and 20% manufacturing, in line with the U.S. employment mix. I also weighted each district according to its GDP contribution…

As you can see, after a brief mid-year bounce, the overall hiring picture continues to weaken. In fact, my combined index contracted for a fourth straight month in December.

Now, let’s look at the combined Fed employment gauge compared to nonfarm payroll data for historical perspective…

In the chart above, I used a three‑month rolling average to smooth out volatility and highlight the trend. The combined Fed survey data tends to lead national hiring. The three‑month average rose late last year, just ahead of a strong nonfarm payrolls report. But it rolled over at the start of this year and has been declining since.

Bottom line: manufacturing and services employment remains fragile. If the BLS confirms this trend when it releases the numbers, it will show that hiring remains well below historical norms.

And if that happens, Wall Street will likely grow more confident in its expectation of two more rate cuts by the end of 2026. That would align with recent comments from policymakers who want to give last year’s adjustments more time to work.

At the end of the day, even lower rates by the start of 2027 would push borrowing costs down, free up cash for households and businesses, and support economic growth. That would help fuel a continued long‑term rally in the S&P 500.

Five Stories Moving the Market:

Delcy Rodríguez, the acting president of Venezuela, invited the U.S. to work with her country on a “cooperation agenda,” following the capture and ouster of former President Nicolas Maduro – Bloomberg. (Why you should care – the potential removal of foreign sanctions on Venezuela could boost long-term global commodity supplies, weighing on prices)

Venezuela is unlikely to see any meaningful boost to crude output for years even if U.S. oil majors do invest billions of dollars in the country; the South American country may have the world's largest estimated oil reserves, but output has plummeted over the past decades amid mismanagement and a lack of investment from foreign firms after Venezuela nationalized oil operations in the 2000s – Reuters. (Why you should care – foreign firms are going to want security guarantees before they start reinvesting in Venezuela’s oil fields)

As Washington barrels toward another government funding deadline on January 30, Republicans and Democrats are in rare alignment: Neither is eager for another shutdown; Democrats haven’t finalized their strategy but are signaling they will not demand a health care deal in exchange for funding the government – Politico. (Why you should care – the lack of a shutdown should help to ease bond market concerns)

Federal Reserve Bank of Philadelphia President Anna Paulson said that further central bank rate cuts could be some way off while officials take stock of the economy’s performance after an active campaign of easing last year – Reuters. (Why you should care – This is consistent with recent commentary by policymakers that they’d like to see how recent rate cuts play out)

China’s services activity expanded at the weakest pace in six months during December, as new export business returned to contraction because of fewer tourist arrivals – Bloomberg. (Why you should care – weak domestic spending points to slowing economic growth)

Economic Calendar:

Fed’s Paulson (Philadelphia) Speaks (Saturday)

OPEC Meeting (Sunday)

Fed’s Kashkari (Minneapolis) Speaks (Sunday)

Japan – au Jibun Bank Japan Manufacturing PMI (Final) for December

China – Caixin China Services, Composite PMI for December

U.K. – BOE Consumer Credit for November (4:30 a.m.)

Eurozone – Sentix Investor Confidence for January (4:30 a.m.)

U.S. – ISM Manufacturing PMI for December (10 a.m.)

Treasury Auctions $86 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)