The Fed Confronts Government Shutdown and Mixed Economic Signals

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

As the government shutdown enters its fifth week, a lack of federal economic data has left policymakers and investors grappling with mixed signals of a weakening labor market and rising inflation. All this comes against the backdrop of consistent yet highly segmented economic growth: since the April meltdown, the S&P 500 has rallied nearly 40 percent year over year, cementing its largest monthly gain since 2021.

According to the Conference Board’s latest report, consumer confidence fell for the third month in a row in October, its lowest level since April, when U.S. President Donald Trump’s “Liberation Day” tariffs sent shockwaves through the economy and financial markets.

While consumers’ current attitudes on business conditions inched upward—their impressions of current job availability improved for the first time since December 2024—they also displayed more pessimism toward future job availability and business conditions. We’ve included a more detailed breakdown of these figures in the Wall Street Wrap section below.

In the absence of official government data, the report also offered more insight into the overall health of the labor market. The survey’s much-watched labor market differential, which measures respondents’ attitudes on whether jobs are plentiful or hard to get, inched higher to 9.4 percent from 8.7 percent in September. However, we note that this reading is well below the 22.2 percent to begin the year and the all-time high of 47.1 percent set in March 2022. This ratio historically has an inverse correlation to the U.S. Labor Department’s official unemployment rate, and its deterioration this year suggests that the labor market continues to soften.

As labor concerns have risen, prices have also continued to climb. As noted in last week’s Market Commentary, headline Consumer Price Index inflation data rose by 3 percent year over year in September—well above the Federal Reserve’s 2 percent target.

This odd combination of a softening labor market and rising inflation, coupled with the lack of federal data, has complicated the U.S. central bank’s dual mandate to achieve maximum employment while also taming inflation.

Fed policymakers chose once again to prioritize the job market in their decision to cut interest rates by a quarter point last week to the lowest level in three years in hopes that lower borrowing rates will boost consumer spending and business expansion.

The decision drew two dissidents, however, reflecting the U.S. central bank’s own conflicting views on the economy: one from Fed Governor Stephen Miran, who backed a larger half-point cut, and another from Kansas City Fed President Jeffrey Schmid, who preferred to hold rates steady.

This marked the first time since 2019 that there were clashing dissents, underscoring the tense debate among Fed officials over how to respond to mixed economic messages and Trump’s sweeping trade policies.

“In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December,” Powell said following the meeting. “A further reduction in the policy rate at the December meeting is not a foregone conclusion—far from it.”

The U.S. central bank chair pointed to the current lack of federal data as a key reason behind this indecision. “We’re going to collect every scrap of data we can find, evaluate it and think carefully about it,” he said. “What do you do if you’re driving in the fog? You slow down.”

Further clouding the economic picture, the Supreme Court will hear the Trump administration’s appeal against lower court rulings challenging the legality of its “international emergency” tariffs on Wednesday. Should the levies be struck down, the economy could soon see another shift in prices, consumer sentiment and the job market.

Deep divisions have begun to form among consumers’ outlooks on the markets in addition to the economy. Nearly 50 percent of respondents in the Conference Board’s survey believe that stock prices will rise in the coming year, one of the highest readings since the group began collecting data in 1987. A rising number also believe that stocks will retreat over the next year, while a historically small number of respondents believe they will stay the same.

Investors can hardly be blamed for their bullishness as another banner earnings season pushes tech giants to new heights. Nvidia became the world’s first $5 trillion company last week amid soaring demand for its artificial intelligence chips and an improved trade outlook with China, while Microsoft passed the $4 trillion milestone thanks to its increased stake in OpenAI.

As the stock market moves into uncharted territory, however, concerns about heightened valuations continue to mount. The Shiller Cyclically Adjusted P/E ratio, favored by investors for its ability to strip out the shorter-term impacts of the business cycle, recently hit a peak of 40.8. This marks the second-highest multiple during a continuous bull market since 1871, reflecting just how elevated valuations have become as the “Magnificent Seven” and other AI-leveraging companies continue to dominate.

This has understandably sparked media chatter over whether AI has driven markets into bubble territory. Much as in the dot-com boom of the 1990s, however, we believe that the technological outperformance driving today’s later-cycle economy will eventually permeate other sectors and segments of the broader U.S. economy and financial markets. This is also where there are cheaper relative valuations that we believe will lead to outperformance in the coming years.

Interestingly, despite the continued tech rally on the back of strong earnings, none of the "Magnificent Seven" stocks were among the 10 top-performing stocks in the S&P 500 last week. Nonetheless, AI was still the driving force behind some of the index’s largest gains last week. Take Caterpillar, the engine equipment manufacturing group that hit an all-time high last after transforming its business model to meet surging data center demand. Much as we saw two decades ago, prevailing technological advances are now crowning winners beyond Silicon Valley, helping widen a deeply bifurcated market in the process.

As the impact of AI transcends Big Tech, it’s important to be prepared for a broadening market. Diversification is the best path to capturing a wide range of outcomes, whatever the future holds.

Wall Street wrap

Last week was noticeably lacking in economic data that would normally provide key insights into the health of the U.S. labor market, inflation and more. The good news is that we use a mosaic of economic data to form our view of the markets and the economy, including private-sector data and quarterly earnings.

Consumers absorb mixed economic signals: As touched on above, the Conference Board’s Consumer Confidence Index inched down by one point in October, to 94.6 from an upwardly revised 95.6 in September, as consumers digested slowing labor conditions. The Present Situation Index—which measures consumers’ attitudes about current business and labor market conditions—gained 1.8 points in October to 129.3. In fact, 20.2 percent of respondents said business conditions were “good,” up from 19.9 percent in September, while 14.7 percent said business conditions were “bad,” down from 15.3 percent.

Looking ahead, however, the mood was more pessimistic. The Expectations Index, which measures consumers’ short-term outlook for income, business and labor conditions, declined by 2.9 points to 71.5, a level the Conference Board notes is in recessionary territory. Expectations have been below the 80-point level that typically signals a recession ahead since February 2025.

“Consumers’ write-in responses were led by references to prices and inflation, which continued to be the main topic influencing consumers’ views of the economy,” said Stephanie Guichard, senior economist, Global Indicators at The Conference Board.

The week ahead

Monday: The Institute for Supply Management (ISM) will release its Manufacturing Purchasing Managers Index for October at 10 a.m. EST. September’s reading registered at 49.1 percent, reflecting a 0.4-percentage-point increase compared to the reading of 48.7 percent recorded in August. This represented the seventh straight month of contraction, following a two-month expansion after another 26 straight months of contraction. We will be watching closely to see if this trend continues.

Wednesday: The ISM will release its Services Purchasing Managers Index for October at 10 a.m. EST. September’s reading was little changed at 50 percent, coming in two percentage points lower than August’s 52 percent and representing the break-even point between expansion and contraction. Separately, the University of Michigan will release preliminary results for its Consumer Sentiment survey, providing more insights into how consumer confidence has been impacted by the weakening labor market and rising inflation. Last month’s data showed that U.S. consumer sentiment dropped to a four-month low of 55.1 in September, down from 58.2 in August. We will be watching to see whether this drop-off continues.

Separately, ADP will release its October National Employment Report, which evaluates the labor market based on payroll data of more than 26 million private-sector U.S. employees, on Wednesday. Preliminary data published last week estimated that private-sector employers added an average of 14,250 jobs for the four-week period ending October 11, 2025, marking a potential turnaround from the 32,000 jobs lost in September.

Thursday: The Challenger Job Cut Report for October will become available at 7:30 a.m. EST. Last month’s report showed that U.S.-based employers announced 54,064 job cuts, a 37 percent drop from the 85,979 cuts announced in August and down 26 percent from the 72,821 announced in September 2024. The report will provide key insights into the labor market amid the lack of government data.

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