U.S. Economic Health Report — December 2025

1. Executive Summary

Economic data for December 2025 present a mixed but informative portrait of the U.S. economy as the year closed. After the prior month’s turbulence caused by data delays, the Bureau of Labor Statistics released its December Employment Situation on schedule, showing that the national unemployment rate slipped to roughly 4.4 percent from 4.6 percent in November. Payrolls increased by about 50 000 jobs, and several services industries continued to add workers, though goods‑producing sectors were generally flat. The private‑sector labour figures from the ADP National Employment Report were broadly consistent: ADP estimated that employers added roughly 41 000 jobs in December, with hiring concentrated in education, health services, and leisure industries. Manufacturing remained in contraction—the Institute for Supply

Management’s manufacturing purchasing managers index fell to 47.9 percent, its lowest level since October 2024, signalling the tenth consecutive month of shrinking factory activity. At the same time, the Treasury yield curve steepened modestly, with the average difference between the ten‑year and two‑year notes widening to about 0.64 percentage points. These indicators together suggest that the economy was still expanding but at a subdued pace, with hiring and production cooling even as expectations for future growth firmed slightly.

2. Labor Market: BLS vs ADP

The December Employment Situation revealed that the labour market continued to cool but did not collapse. The unemployment rate moved down to about 4.4 percent in December as 50 000 jobs were added, following small gains and revisions in prior months. Approximately 7.5 million people were unemployed, and the labour force participation rate held around 62.4 percent, a level that has changed little over the course of the year. Among major worker groups, unemployment rates were roughly unchanged: adult men and women were each around 3.9 percent, Whites 3.8 percent, Blacks 7.5 percent, Asians 3.6 percent, and Hispanics 4.9 percent.

Long‑term unemployment remained at about 1.9 million, representing roughly a quarter of all unemployed persons. The number of individuals working part time for economic reasons was 5.3 million, up nearly one million over the year, signaling that some people could not find full‑time work or had their hours cut. Those not in the labour force who wanted a job numbered about 6.2 million, still elevated compared with a year earlier. Overall, the household survey portrayed a labour market that remains relatively tight but with signs of strain among those seeking full‑time employment.

The establishment survey showed that most of December’s job gains were concentrated in a handful of services industries. Food services and drinking places added about 27 000 jobs, health care about 21 000 (including an increase of 16 000 in hospitals), and social assistance roughly 17 000 positions. Employment in retail trade fell by approximately 25 000, with notable declines at warehouse clubs and supercenters.

Federal government employment was little changed. Payrolls in manufacturing, construction, professional and business services, and other major industries were essentially flat. Average hourly earnings for all private‑sector employees rose $0.12 to around $37.02, and earnings for production and nonsupervisory workers edged up to about $31.76. The average workweek in manufacturing slipped to 39.9 hours while overtime remained roughly 2.9 hours. These details indicate that while hiring continued in consumer‑facing services, producers and retailers were either cutting staff or holding employment steady.

ADP’s December National Employment Report provided a complementary view of private‑sector employment. It estimated that private employers added approximately 41 000 jobs, a modest rebound after November’s decline. Job gains were clustered in education and health services, which added nearly 39 000 workers; leisure and hospitality, which added about 24 000; and trade, transportation and utilities, up roughly 11 000. Hiring at small establishments (fewer than 50 employees) rose by around 9 000, while medium‑sized firms (50–499 employees) added approximately 87 000. Large employers, however, shed about 55 000 jobs as firms with 500 or more employees continued to trim staff. Goods‑producing industries remained weak: manufacturing cut roughly 5 000 jobs and construction employment was essentially flat. Professional and business services lost roughly 29 000 positions, and information services reduced payrolls by about 12 000. Regionally, ADP reported job losses in the West but gains in the Midwest, Northeast and South. ADP also observed that pay growth for job‑stayers slowed to about 4.4 percent year‑over‑year, down from a 4.5 percent pace the previous month, while job‑changers saw pay increases of roughly 7.4 percent—still elevated but trending lower.

Taken together, the BLS and ADP data suggest a labour market in which hiring is still occurring, especially in health care and leisure, but at a markedly slower pace than earlier in the cycle. Employers appear to be cautious, with larger companies trimming workforces and pay gains decelerating.

3. Yield Curve Analysis

Interest‑rate markets in December offered a cautious but somewhat more optimistic signal than in the prior month. The average yield on the ten‑year Treasury note for the month was about 4.14 percent, while the average yield on the two‑year note was roughly 3.50 percent. The resulting 10‑year minus 2‑year spread of approximately 0.64 percentage points represented a modest steepening from November’s 0.54 percentage‑point difference. A positive spread—the yield curve is said to be “normal”—typically implies that investors expect future economic growth and inflation to be higher than short‑term rates. During much of 2024 and early 2025 the yield curve was inverted, meaning short‑term rates exceeded long‑term rates, which historically has signaled heightened recession risk. The sustained positive spread since late August 2025 therefore marks an important shift. Nevertheless, the curve remains flat by historical standards: before the pandemic, a spread of one to two percentage points was common during expansions. The modest steepening in December suggests that bond markets have become slightly more confident that economic growth may firm or at least not deteriorate sharply in 2026.

However, investors remain mindful of persistent inflation, global trade uncertainties, and the Federal Reserve’s monetary policy path. Should the spread narrow again or invert, it would raise fresh concerns about economic momentum.

4. Manufacturing and Business Activity (PMI)

The manufacturing sector remained the economy’s weak link in December. The Institute for Supply Management’s Manufacturing PMI fell to 47.9 percent, down from 48.2 percent in November and marking the tenth straight month of contraction. A reading below 50 signifies that more manufacturers reported worsening conditions than improving. In December, 13 of the 18 manufacturing industries surveyed reported a decline in new orders, indicating broad weakness in demand. The new orders subindex ticked up slightly to 47.7 percent from 47.4 in November, but remained below the expansion threshold and has contracted in ten of the past eleven months. The production index dipped to 51.0 from 51.4, suggesting output growth slowed but remained in expansion territory. Inventories fell sharply, with that index plunging 3.7 percentage points to 45.2, reflecting efforts by firms to draw down stockpiles as demand remained weak.

The employment subindex registered around 44 percent, indicating an eleventh month of job cuts in manufacturing and the sector’s longest hiring slump in about five years. Prices paid remained elevated at 58.5, signaling that input costs continued to rise despite weak demand. Supplier deliveries slowed, with those conditions supporting modest price pressures.

Overall, 85 percent of manufacturing gross domestic product was estimated to be in contraction in December, compared with 58 percent in November, and the share of manufacturing GDP in deep contraction (a PMI at or below 45) increased to roughly 43 percent. Computer and electronic products was one of the few major industries to report expansion, while most others—such as apparel, wood products and nonmetallic minerals—continued to contract. Respondents cited soft demand, high tariffs on imported components, and uncertain trade policy as factors weighing on business. Although some improvement in new orders and backlog measures offered hope for a future rebound, the manufacturing sector appeared to be firmly in a downturn at year’s end.

5. Integrated Economic Outlook

Synthesis of December’s indicators underscores that the U.S. economy was in a late‑cycle phase characterised by slowing momentum but continued resilience in services and consumer spending. The labour market, while still generating jobs, cooled noticeably: the unemployment rate declined to 4.4 percent but remains higher than at the start of the year, and payroll gains averaged roughly 50 000 per month in the fourth quarter, well below the 2024 average of 168 000 per month. Workers are finding jobs more slowly, and an increasing number are settling for part‑time positions. ADP’s data confirm that small and medium‑sized employers are hiring selectively while large firms retrench.

Wage growth is moderating, suggesting that inflationary pressures from the labour market may continue to ease. The manufacturing slump represents a significant headwind, as factory orders and employment have contracted for most of the year, and high input costs remain a burden. Nevertheless, the services sectors—including food services, health care and leisure—continue to expand, providing a buffer against a more pronounced downturn. The yield curve’s modest steepening reflects improved sentiment relative to earlier in the year, though the curve remains flatter than typical during expansions, indicating that investors expect the economy to grow slowly. Taken together, the data point to an economy that is still expanding but at a diminishing pace, with clear signs of late‑cycle fatigue.

The combination of a cooling labour market, persistent manufacturing contraction and a flattening—but positive—yield curve suggests that growth may continue to decelerate in the months ahead, though a near‑term recession is not a foregone conclusion.

6. What to Watch Next Month

• January Employment Situation (early February release): Analysts will look to see whether the unemployment rate stays around 4.4 percent or ticks higher, and whether payroll gains regain momentum or slow further.

• ADP January Employment Report: Observers will compare the ADP estimate with BLS data to gauge whether private hiring remains modest and whether small and medium‑sized firms continue to add jobs while large employers cut back.

• Manufacturing PMI: The January PMI will reveal whether factory activity stabilises or continues to decline; particular attention will be paid to the new orders and employment subindices for signs of a turnaround.

• Yield Curve Movements: Changes in the ten‑year minus two‑year spread will indicate how investors interpret economic prospects; sustained steepening could signal improved confidence, while renewed flattening or inversion would amplify concerns.

• Consumer and Services Sector Trends: Holiday sales and early 2026 consumer spending data, along with services sector surveys, will help determine whether resilient household demand can offset manufacturing weakness and support overall economic growth into the new year.