TGA Account Archives - the patient investor %

January 11, 2026

US Labor Market and Cyclical Sectors Warn of a Contraction

Key Points

The US economy added 50,000 jobs in December, but employment in cyclical sectors is contracting, indicating a slowing economy.
Declining cyclical indicators for housing, manufacturing, and transportation, and a declining Coincident Economic Activity Index, also warn of an economic slowdown.
Average hourly earnings are growing at an annual rate of nearly 4.0%, above the federal funds target range of 3.5% to 3.75%, suggesting that the Fed expects an economic contraction.
Small-caps are outperforming mega-cap technology stocks, which is typical of the final stage of a bull market.

According to the Bureau of Labor Statistics, the US economy added 50,000 jobs in December, the eighth consecutive month of dismal nonfarm payroll growth.

Employment Growth

Excluding government layoffs makes little difference to poor job growth. Private-sector jobs excluding healthcare grew by only 15,900 in December.

Employment Growth: Private Sector excluding Health Care

Cyclical sectors — manufacturing, construction, transportation, and warehousing — account for 17% of total nonfarm employment in the US but are typically responsible for most job losses during a recession. The sectors have shed 164,000 jobs since their February 2025 peak, indicating that the economy is slowing. A drop of 300,000 would signal a recession.

Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

The unemployment rate, based on the monthly household survey, declined to 4.4% in December, below the typical 5.0% minimum during a recession.

Unemployment

However, employers are cutting back employees’ hours. Average weekly hours worked declined to 34.2 in December, a sign that layoffs are likely to follow.

Average Weekly Hours

Employers are also cutting back on temporary help services, another typical sign of a recession.

Temporary Employment

Average Hourly Earnings and Fed Monetary Policy

Average hourly earnings grew at an annualized rate of 3.9% in December, compared to a 3-month average of 4.0%, a 6-month average of 3.9%, and a 12-month average of 3.8%. Growth rates are nearly double the Federal Reserve’s 2.0% inflation target, reflecting underlying inflationary pressures.

Average Hourly Earnings

Fed monetary policy is becoming stimulative, with average earnings growth now exceeding the latest Fed funds rate (FFR) target range of 3.5% to 3.75%, suggesting a negative real Fed funds rate. Monetary policy is restrictive (beige below) when FFR is higher than average earnings growth, and stimulative (green) when FFR is lower.

Fed Funds Rate & Average Hourly Earnings Growth

Stimulative monetary policy risks fueling inflation if not offset by deflationary pressures from a contracting economy.

Consumers

Residential housing construction is a major cyclical employer, and declining new housing starts and permits signal an impending economic contraction.

Housing New Starts & Permits

The University of Michigan Index of Consumer Sentiment provides another recession warning, with the 3-month average at a record low since the survey commenced in 1960.

University of Michigan: Consumer Sentiment

The Index of Current Economic Conditions is similarly at its lowest level in the past 65 years.

University of Michigan: Current Economic Conditions

Inflation expectations remain elevated, averaging 4.3%, more than double the Federal Reserve’s target rate.

University of Michigan: 1-Year Inflation Expectations

Economy

Aggregate weekly hours worked grew by 0.6% in 2025, suggesting that real GDP growth will likely decline from the 2.3% year-on-year growth in Q3 of last year.

Real GDP & Total Hours Worked

The Philadelphia Fed Index of Coincident Economic Activity grew by 2.15% over the 12 twelve months to November 2025. Values below 2.5% warn of a recession.

Philadelphia Fed Coincident Economic Activity Index

Heavy truck sales are also declining, with the 12-month moving average falling to 34.0 thousand units. The decline of more than 10% from the October 2023 high of 43.0 thousand indicates a recession.

Heavy Truck Sales

ISM Manufacturing

The ISM Manufacturing PMI declined to 47.9% in December, the tenth consecutive month of contraction in the sector.

ISM Manufacturing PMI

New orders declined to 47.7% for the sector, indicating a deteriorating outlook.

ISM Manufacturing New Orders

The Prices Index declined to 58.5%, indicating continued growth in producer prices, although the rate has slowed from the first half of 2025.

ISM Manufacturing Prices

ISM Services

The large services sector continues to expand, with the ISM Services PMI rising to 54.4% in December.

ISM Services PMI

However, the Prices Index, at a strong 64.3% in December, indicates that inflationary pressures remain a problem.

ISM Services Prices

Financial Markets

Commercial bank reserves recovered to $3.0 trillion, reflecting improved liquidity in financial markets.

Commercial Bank Reserves at the Fed

Increased Federal Reserve purchases of Treasury bills under the new Reserve Management Purchases (RMPs) program helped bolster bank reserves.

When the Fed made that announcement in December, it said that RMPs for the month from December 12 to January 12 would amount to $40 billion.

The Fed will announce in a few days the amount of the RMPs to be purchased during the next 30-day period. The amounts will vary by season. The Fed is currently frontloading for April 15 Tax Day, when big liquidity strains are expected. (Wolf Richter)

The Fed’s balance sheet expanded for the first time since 2023, driven by RMPs and a $75 billion increase in the standing repo facility (SRF) on December 31 to support repo market liquidity.

Fed Total Assets

Most of the SRF was repaid the following week, but the secured overnight funding rate (SOFR) still warns of liquidity shortages. An SOFR above the interest rate paid by the Fed on reserve balances (IORB) indicates that the Repo market is prepared to pay a premium to attract funding from commercial banks.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

A decline of more than $150 billion in the Treasury General Account at the Fed also helped boost liquidity over the year-end period.

Fed Liabilities: Treasury General Account (TGA)

The National Financial Conditions Index from the Chicago Fed continues to indicate loose monetary conditions, declining to -0.5536 on January 2.

Chicago Fed National Financial Conditions Index

A Bitcoin (BTC) recovery above 90,000 also indicates improving liquidity in financial markets. The volatile cryptocurrency is retracing to test the new support level, and respect of 90,000 would confirm improving monetary conditions.

Bitcoin (BTC)

Stocks

The S&P 500 reached a new high, testing resistance at 7000, but declining Trend Index peaks continue to warn of secondary selling pressure.

S&P 500

The Roundhill Magnificent 7 ETF (MAGS) reversed its uptrend relative to the iShares Russell 2000 ETF (IWM), indicating that small-cap stocks are now outperforming mega-cap technology stocks. Market leaders falling behind and no longer leading advances is a typical sign of the final stage of a bull market.

Roundhill Magnificent 7 ETF (MAGS) relative to iShares Russell 2000 Small Caps ETF (IWM)

Conclusion

The labor market reports dismal job growth in December, but cyclical sectors of the US economy are shedding jobs, warning of an economic contraction ahead. A decline in average weekly hours worked and in temporary help services indicates that employers are tightening their belts, and layoffs will likely follow.

Average hourly earnings are growing at an annual rate of nearly 4.0% while the federal funds target range is 3.5% to 3.75%. Fed monetary policy risks fueling inflation if not offset by deflationary pressures, indicating that the central bank expects an economic contraction.

Declining cyclical sector indicators, including new housing starts, heavy truck sales, and a tenth consecutive month of contraction in the ISM Manufacturing PMI, all warn of a slowing economy. This bearish outlook is also supported by a slowing Coincident Economic Activity Index and weak annual growth in aggregate hours worked.

The Fed and the US Treasury are doing their best to support financial market liquidity, but Bitcoin at 90,000 continues to warn of weak liquidity.

Small-cap stocks are now outperforming mega-cap technology stocks, a pattern typical of the final stage of a bull market, suggesting that the S&P 500 may struggle to break the 7000 resistance level.

Acknowledgments

CoinDesk: Bitcoin
Federal Reserve of St Louis: FRED Data
Institute for Supply Management: ISM Report on Business
University of Michigan: Consumer Surveys
Wolf Richter: Fed Balance Sheet Drops by $67 Billion for the week

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

June 7, 2025June 7, 2025

Stocks lift on jobs report but keep your eyes on the dollar

Summary

A stronger-than-expected BLS labor report buoyed stocks
The stronger jobs figures reduce the chance of further Fed rate cuts
Speculators are covering positions in long-term bonds, causing yields to rise
Higher long-term yields are, in turn, bearish for stocks

The S&P 500 was buoyed by a stronger-than-expected labor report, with little sign of the economy slowing from President Trump’s flip-flop on tariffs. A breakout above strong resistance between 6000 and 6100 would signal a fresh advance, but we advise caution as it could be a bull trap.

S&P 500

Financial Markets

Financial market liquidity has improved, with the Chicago Fed National Financial Conditions Index declining to a revised -0.476 on May 30.

Chicago Fed National Financial Conditions Index

A sharp fall in the Treasury General Account (TGA) at the Fed injected more than $200 billion into financial markets in recent weeks, but that is not sustainable for long.

Fed Liabilities: Treasury General Account (TGA)

A declining spread on Moody’s Baa corporate bonds shows the beneficial effect on credit markets.

Moody's Baa Corporate Bond Spreads

Treasury Markets

Speculators anticipating a series of Fed rate cuts are covering positions in long-term Treasuries, lifting the yield to 4.5%. Follow-through above 4.5% would offer a short-term target of 4.8%, prompting further action by Treasury Secretary Bessent to keep a lid on long-term rates. However, he can only do so much without the Fed’s help.

10-Year Treasury Yield

Economy

Employment in cyclical sectors—manufacturing, construction, and transport and warehousing—remains strong at 27.8 million, with no sign of the typical contraction that precedes a recession.

Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

Unit sales of heavy-weight trucks are declining gradually rather than the steep fall that typically precedes a recession.

Heavy Truck Sales

However, declining real manufacturers’ new orders for capital goods (excluding defense and aircraft) for April, adjusted by the producer price index (for capital goods), warn of a sharp fall in new capital investment.

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft/PPI for Capital Equipment

Labor Market

Jobs grew by a better-than-expected 139 thousand in May. However, the figure is seasonally adjusted and likely subject to revision.

Employment Growth

Continued claims increased to 1.9 million by May 24, but the unemployment rate remained 4.2% in May, well below our 5.0% warning level.

Continued Claims & Unemployment

Growth in aggregate hours worked slowed to an annualized rate of 1.0%, warning of a similar decline in GDP growth in the second quarter.

Total Hours Worked

Temporary jobs have contracted to 2.5 million, reinforcing the bearish sign from declining growth in hours worked.

Temporary Employment

The gap between job openings and unemployment has narrowed, indicating that the labor market is now in balance.

Job Openings

However, average hourly earnings continue to grow at close to 4.0%, signaling underlying inflationary pressures in the economy.

Average Hourly Earnings

Dollar & Gold

The US Dollar Index continues to test long-term support at 100. Follow-through below 98 would offer a target of 90, warning of capital outflows and a strong bear signal for the bond market.

Dollar Index

Gold is patiently testing resistance at $3,400 per ounce, waiting for a bear signal from the Dollar Index. A breakout would strengthen our target of $4,000 by the end of the year.

Spot Gold

Silver made a sharp breakout above resistance at $34 per ounce. We expect retracement to test the new support level. Respect will likely confirm the breakout, but, having been burned before, we remain wary of a bull trap.

Spot Silver

Conclusion

The rise in stocks is likely short-lived as rising long-term interest rates will likely spoil the party. The Fed is unlikely to heed President Trump’s call for a 100 basis-point cut:

“Go for a full point, Rocket Fuel,” Trump said in a post on Truth Social, adding that the Fed could increase rates again if inflation reignited. (Reuters)

The labor market remains in balance, and signs that the economy is slowing more likely reflect the impact of poor trade policy rather than too-high interest rates.

All eyes should be on the dollar. A Dollar Index fall below 98 would warn of capital outflows—a bear signal for bonds and stocks and a bull signal for gold.

Acknowledgments

Reuters: Fed likely to leave rates unchanged as US job market cools but doesn’t crumble
Federal Reserve of St Louis: FRED Data

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 29, 2023November 30, 2023

Fed stealth liquidity may presage early rate cuts

Commercial bank cash assets, representing reserves held at the Fed, reversed its down-trend after September 2022 — when the UK gilt crisis occurred — and is now edging higher, reflecting stealth liquidity support from the Fed and Treasury.

Commercial Bank Reserves

Fed QT is reducing liquidity at the rate of $95 billion per month but the effect of discount lending and reduction of RRP facilities means that net liquidity is increasing.

The diagram below, from Cross Border Capital, shows how Fed and Treasury actions affect money market liquidity. The Fed injects liquidity by buying securities (QE) and discount lending to banks (including the Bank Term Funding Program introduced in response to the SVB crisis in March). It withdraws liquidity via sales of securities (QT) and reverse repo (RRP) borrowings (mostly from money market funds). Treasury can also reduce liquidity by increasing its TGA account at the Fed — when taxes and net debt issues exceed spending.

Money Market Liquidity

Low corporate bond spreads confirm that credit is readily available in the bond market.

Moody's Baa Corporate Bond Spreads

Coincident economic indicators indicate that the economy is gently slowing, rather than contracting.

Coincident Index

Declining growth in aggregate hours worked suggests that the Fed and Treasury have succeeded in manufacturing a soft landing — despite high interest rates — by providing liquidity support.

Estimated Aggregate Non-Farm Weekly Hours Worked

So far, this has worked but high short-term interest rates are attracting retail investors to money market funds, bypassing the banks.

Retail Money Market Funds

Low bank deposit growth is likely to cause a contraction of bank credit, as in November below, as smaller regional banks struggle to fund credit growth.

Commercial Bank Loans & Leases

More than 20% of banks are tightening credit standards and widening credit spreads. That normally indicates a recession.

Domestic Banks Tightening Credit Standards & Widening Spreads to Small Firms

Conclusion

The Fed and Treasury are providing sufficient liquidity to financial markets to avoid a contraction. Larger borrowers have ready access to credit through the bond market but small to medium-size enterprises — who borrow mainly from regional banks — are likely to find credit difficult to obtain as smaller banks struggle to compete with money market funds for deposits.

The Fed may be forced to cut rates if this continues — to ensure that small- and medium-sized businesses have sufficient access to credit ahead of the November 2024 elections.

Acknowledgements

Cross Border Capital @crossbordercap for the Money Markets diagram
Wolf Richter for the retail money market fund graph

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.