MW The state of the U.S. economy: strong growth, low layoffs and lingering inflation
By Jeffry Bartash
Federal Reserve might not cut interest rates again until the summer
Inflation might be slowing again, but it hasn't gone away.
A consumer-fueled U.S. economy is still growing at a strong pace, a weak jobs market might be on the mend and inflation is still a lingering - if smaller - problem than it was a few years ago.
That's what we learned on Thursday from the latest batch of reports on the economy.
Gross domestic product, the official scorecard of the economy, grew at a sharp 4.4% annual pace in the third quarter. The economy was in a good position toward the end of the year to top 2% growth in 2025 for the fifth year in a row.
The big driver was consumer spending. Households spent a lot in the third quarter - and they kept spending in the first two months of the fourth quarter. Consumer spending rose 0.5% in both October and November.
The labor market, meanwhile, could be turning the corner. Companies aren't creating many new jobs, but they aren't eliminating many jobs, either.
The number of people being laid off each week, quite surprisingly, is less now compared with a year ago. All those big corporate-layoff announcements in the fall, it turns out, didn't move the needle at all.
Even better, the number of people already collecting unemployment benefits appears to have flatlined around 1.8 million to 1.9 million. They had been rising steadily for several years until the fall - a sign of how difficult it was for unemployed people to find a job.
That's a sign the labor market is stabilizing, some economists say. Which is exactly what the Federal Reserve wants to see.
The central bank cut a key U.S. interest rate three times since September to prevent a further deterioration in the labor market and to halt the rise in unemployment.
Yet with the rate of inflation still stuck close to 3%, top Fed officials are leery of cutting rates any more for now. The central bank is expected to leave rates unchanged at its first meeting of 2026 next week.
Fed officials want to see further improvement in the jobs market and signs that inflation is beginning to slow again.
Key details: Third-quarter GDP was revised up to 4.4% from an original 4.3%, the government said Thursday.
Consumer spending rose a healthy 3.5% in the third quarter and there was little letup in the first two months of the fourth quarter.
New jobless claims, meanwhile, totaled a meager 200,000 in mid-January, a remarkably low number that points to the low level of layoffs in the economy.
The Fed's preferred inflation gauge, known as the PCE index, rose to a yearly rate of 2.8% in November, the Bureau of Economic Analysis said. That was up from 2.7% in October.
The 12-month rate of core inflation also inched up to 2.8% in November from 2.7%.
The BEA released the long-delayed October and November inflation readings in a combined report. Both had been postponed by the record 43-day government shutdown before the holiday season.
Inflation is still stuck well above the Fed's 2% target, but price pressures appeared to ease a bit toward the end of last year. It's hard to know for sure because the shutdown made it more difficult for the BEA to calculate inflation.
The pivotal December PCE report, due in another month, is expected to shed more light on the latest trend in inflation. Some forecasters say the rate of inflation could move up again to 3% for the first time in nearly a year.
Big picture: The Fed appears in no hurry to cut interest rates again soon, with inflation still well above target and the labor market appearing to stabilize.
Top Fed officials want to see more economic reports on inflation and the jobs market before taking another big step. Current market forecasts suggest no Fed rate cut again until at least the early summer.
Looking ahead: "The catch-up consumer spending and inflation data for October and November paint a picture of robust consumer spending amid tamer inflation," Kathy Bostjancic, Nationwide chief economist, said in a note to clients.
Market reaction: The Dow Jones Industrial Average $(DJIA)$ and S&P 500 rose in Thursday trading. The yield on the 10-year Treasury note (BX:TMUBMUSD10Y) rose slightly to 4.27%.
-Jeffry Bartash
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 22, 2026 11:37 ET (16:37 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments