Guest Post: Financial Markets and Economic Update Fourth Quarter 2025

I had the best fourth quarter!  I’ve always wanted to visit Europe’s Christmas Markets and finally did in late November to early December on a Viking River Cruise from Budapest to Regensburg.  We loved Budapest, especially with both sides of the Danube River lit up at night.  We loved the Christmas Markets, especially in Budapest, Vienna, and Salzburg.  The best mulled wine was in Salzburg, which is an amazing city close to the Alps with so much culture and history.  The best food was in Regensburg.  It was special to sail from place to place, exploring, learning, shopping at Markets, listening to concerts, and enjoying every day.  For me, it is a dream come true and was actually a retirement gift, booked over two years ago.

Government Shutdown

We all saw it coming.  The government shut down on October 1^st when the Senate could not get 60 votes to get a continuing resolution passed.  Whatever happened to annual budgets, I’ll never know.  We keep pushing the current spending levels ahead by a few months.  Democrats first demanded $1.5 trillion in additional spending, including extension of Obamacare subsidies, which they themselves allowed to expire at the end of this year, but the Republicans held firm.  No.  Finally, in November, eight Democrats crossed the aisle to get to the 60 votes needed to pass the continuing resolution and reopen government, but with a near-term expiration of January 30^th.  It was the longest shutdown in history at 43 days.

So, we get to go through this madness again?  Government employees not getting paid, air traffic controllers not coming to work consistently, SNAP or food stamp benefits delayed, and government economic data suspended were all big negatives.  Republicans are not going to fund insurance companies in the failed Obamacare ACA anymore, they will not extend covid subsidies (covid is over!), and they will no longer pay for illegal immigrants. 

During the shutdown, NASA was busy tracking 3I Atlas, which they call a “comet” streaking across our solar system.  Is it a comet?  Is it an alien spacecraft?  Today, it makes its closest pass to Earth, albeit several hundred million miles away.  We shall see if the ETs send us a message.

Inflation

CPI for November surprised to the downside at +2.7% year-over-year; the core CPI was +2.6%.  CPI typically runs about .50% higher than PCE, upon which the Fed targets are set.  CPI is almost there to its implied target of +2.5%.  However, we only have PCE figures from September, which were +2.8% for the headline and core measures. 

There are plenty of hopeful signs that inflation will be declining in 2026.  Crude oil has fallen from nearly $80 per barrel to $55 this year.  Gas prices broke below $3.00 to $2.90 per gallon now.  Large increases in owners equivalent rent are fading, mainly due to deportations of illegal immigrants.  There is room for improvement in electric and natural gas prices, which rose +4.2% y-o-y, as capacity increases and regulations are reduced.  Food prices are tempering; one example is the cost of a Thanksgiving dinner in 2025 fell -5.2% from 2024 to $55.18.

Affordability is the big political buzzword right now.  The past four years brought us the highest inflation in two generations, from explosive government spending, supply chain issues, and a slow reacting Fed that fueled a spike in the CPI index of +20% between 2021 and 2024.  Expect CPI to continue its decline in annual pace, but it will be difficult to overcome the 20% increase in the level of CPI without deflation.  Focusing on growing real wages will certainly help with affordability.

Housing

Housing inflation is clearly down in this struggling sector.  Recent reports show y-o-y price increases diminishing, including the S&P/Case Shiller at +1.4% in September, FHFA at +1.7%, Moody’s at +2.0%, and existing home median sales prices at +1.2%.  Zillow reports that 53% of homes nationally have lost value in the year ended October, 2025, which is the highest percentage increase since April, 2012.  Prices in the Northeast are stable.  There’s a slowdown in demand, with existing home sales up only +.5% in November.  Inventories remain an issue with scarce supply at 4.2 months’ worth of sales.

Mortgage rates continue their painfully slow decline, with the 30-year rate at 6.21% according to FHLMC.  Monthly mortgage payments are still unaffordable for many potential buyers.  Property taxes in many counties are rising along with prices, and in many cases along with declines in value, adding to the angst of existing and potential homeowners.  Due to the government shutdown, new home sales data is delayed.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator was released for September and the trend continued to be negative, with September and August each at -.3%, leaving the index at 98.3 (2016=100).  For 36 of the last 40 months, the index has been negative.  Four months registered no change:  July, 2025, May, 2025, November, 2024, and March, 2024.  There was once a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  So what are we to make of this index falling for over three years, continually signaling a recession that never came?   By the way, the yield curve inversion lasted for years, also signaling a recession.  With Federal Reserve easing, $10 trillion of new investment in manufacturing in the US committed, strong stock markets and earnings prospects, and fiscal stimulus in 2026, I don’t see recession coming soon.

Employment- Job growth has been showing weakness for months.  I can’t help but wonder how much of the decline in payrolls is related to deportations/immigration and cuts in government jobs.  Payrolls rose in November by +64,000, fell in October by -105,000, and rose in September by +108,000.  The unemployment rate rose to 4.6% in November from 4.4% in September.  A bad sign is that the pool of available workers is pushing 14 million, currently at 13.967 million.  Job openings are high in October at 7.67 million.  Quit rates fell below 2.0% to 1.8%, possibly showing workers unease about leaving jobs.  Challenger layoffs averaged 92,820 for the three months ended in November.  Wages rose +3.5% y-o-y in November; real wages have been positive for months.

Real GDP-  We have not received 3Q25 data yet, but the Atlanta Fed GDP Now projection is for +3.5%, following +3.8% in 2Q25, and -.6% in 1Q25.  Imports and inventories distorted both 1Q25 and 2Q25, as companies tried to get ahead of tariffs.  Real final sales strengthened to +2.9% in 2Q25 from +1.9% in 1Q25.  For the first time in a long time, the budget deficit is expected to decline as a percentage of GDP which will be slightly negative to growth.  Final tax changes from the OBBB include accelerated depreciation deductions for business investment and this will improve real GDP.  We are still held back by $38 trillion of US government debt, which is 126% of GDP; if greater than 90% for an extended time (since 2009), real GDP is impaired by about one-third.

Productivity- The talk is all AI, all the time.  Yes, AI will increase productivity and efficiency.  GDP can grow strongly without creating inflation if productivity is also strong.  (We witnessed this in the 1990s).  2Q25 productivity was +3.3% after a decline of -1.8% in 1Q25.  Capacity utilization is recently low at 77.4%, so we can afford to increase productive capacity without inflation.  And remember, if productivity meets its long-term average of +3.5%, employers are amenable to passing on 1.5% of it plus an inflation target of 2.0% for total raise of +3.5% without inflationary impacts.

Moody’s Beige Book Index- The index remained positive again in November at 11.1, following October of 13.9 and September at 0.  There were negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed four districts increasing modestly, three with no change, and five in decline, including Philadelphia.

M2 Money Supply- M2 continues its upward growth trend at a steady clip on a y-o-y basis, with October at +4.6%, September at +4.5%, August at 4.4%, and year-to-date through October at +4.1%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  The velocity of M2 remains at 1.39 for both 1Q25 and 2Q25.  Expect M2 to continue to rise as QT has now ended.

Fed Actions

Another meeting, another rate cut.  That’s three in a row since September for a total easing of .75%, bringing Fed Funds to 3.50% to 3.75%.  The FOMC must have heard my criticism of their anemic GDP projections in September.  They now have raised their GDP projection to +2.3% in 2026.  But, true to form, they project taking two years to reach their inflation targets.  It’s always two years away!  It’s ridiculous!  Thankfully, Powell’s departure is not two years away.  I held to my pledge not to watch his press conferences in October or December and not to watch his BS, doublespeak, and “fog” worries ever again.  This is the same man I called a hero during the covid pandemic but his handling of inflation, QE and QT, and money supply turned me off for good.

The Fed finally ended QT on December 1^st.  They caused trouble in the money markets again by stubbornly refusing to ease enough.  Bank reserves are falling and there was great pressure on short-term funding rates.  SOFR was consistently above the IOR rate.  At the December meeting, they announced they will buy T-Bills as needed to help liquidity in the money markets; first up $40 billion of purchases.

The real Fed Funds rate is now about 1.00% (3.75% less PCE 2.8%).  There’s room to cut more.  Many economists estimate that the neutral rate for Fed Funds is 2.50% to 3.00%.

Year-End

We are almost there!  It will be Christmas before you know it!  We made it through a quarter where we saw:

•            On October 19^th, thieves stole $100 million in jewels from the Louvre
•            Jamie Dimon talking about cockroaches and loan losses
•            On November 12^th, the Philadelphia Mint produced the last penny.  It cost 4 cents to produce 1 cent.
•            A record government shutdown from October 1^st to November 13^th
•            Winter starting early with a snowstorm on December 14^th
•            The navigation of 3I Atlas throughout our solar system
•            Dorothy’s navigation of the Danube River

I wish you and your friends and families a Merry Christmas and a Happy New Year 2026!

I appreciate your support!  Thanks for reading!  DLJ 12/19/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.