1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 61
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
The manufacturing sector warrants a mention as employment here has contracted for seven
consecutive months to sit 63k below 2024-end levels as at November 2025. At 3.1%, the job
openings rate for the sector lags the broader labour market’s 4.6%, whereas the manufacturing
quits rate – a measure of voluntary job separations – is three tenths lower than the overall quits
rate, suggesting manufacturing employees are less optimistic about job prospects and prefer to
hold on to their current job. Part of this could be due to the White House’s protectionist agenda
which has weighed on sentiment amongst manufacturing firms, anchoring the Institute for
Supply Management’s manufacturing PMI in contraction territory since March 2025.
The Bureau of Labor Statistics’ household survey which is used to compute the unemployment
rate showed an increase to 4.6% as a 95k gain in the employed population failed to fully absorb
labour force growth (the participation rate ticked up to 62.5%). The U.S. unemployment rate is
0.6ppt higher than its year-to-date low seen at the beginning of the year. Since June when the
unemployment rate sat at 4.1%, it has notched 0.1ppt increases in each of July, August, and
September, only to follow it up with a 0.2ppt uptick in November. Note that a household survey
for October was not published. This figure sits 0.1ppts above the Fed’s year-end unemployment
rate projection of 4.5% in their latest Summary of Economic Projections (SEP). A separate
measure of unemployment – the U-6 rate – which includes discouraged and underemployed
workers has also been on the rise.
U.S. unemployment is starting to trend higher
7%
11%
10%
6%
9%
5%
8%
4%
7%
3%
6%
5%
2%
2021
2022
2023
U3 unemployment rate - LHS
2024
2025
U6 unemployment rate - RHS
Source: Bureau of Labor Statistics, Bloomberg Finance LP, Scotia Wealth Management
The Fed may reach its terminal policy rate in 2026, sooner than implied by the latest SEP
Job market weakness has been the primary driver behind the Fed cutting its policy rate for the
third consecutive time in December. The official statement contained minimal changes, save for
the re-inclusion of the phrase “in considering the extent and timing of additional adjustments to
the target range for the federal funds rate the Committee will carefully assess incoming data, the
evolving outlook, and the balance of risks.” This phrasing has been used in the past to signal a
more cautious monetary policy stance.
As for the SEP, the median dot remained unchanged to imply a quarter point cut for 2026 and
the terminal policy rate being reached in 2027. We expect future policy easing to be front loaded,
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