Short-term stability but with structural challenges

The US labour market indicators stabilised in Q4 2025, but underlying challenges persist, reflecting the 'low-hiring, low-firing' dynamics that defined much of last year. In January, nonfarm payrolls (NFP) exceeded expectations, rising by 130k, above expectations of 70k. While January's report was undeniably strong, the structural slowdown in US employment growth remains striking, particularly considering the significant negative benchmark revisions. Benchmark adjustments and technical changes resulted in total negative NFP revisions of -1.03m for 2024-2025, underscoring the sharp slowdown in job creation. Monthly NFP growth averaged just +15k in 2025, a stark decline from +122k in 2024 and +210k in 2023. 

Education and health care accounted for the majority of job gains in January, and the sector was the most important driver of employment growth also in 2025, contributing 709k positions. 

High-frequency data suggests a stabilisation in jobs growth, but the December JOLTS report highlights that labour market conditions remain soft. Job openings fell to 6.5m, the lowest level since September 2024 and well below the expected 7.2m. The job openings-to-unemployed ratio dropped to 0.87, its weakest since March 2021. Historically this has predicted slower wage growth with a lag of about six months, as workers bargaining power weakens (Chart 2). These trends, weak job openings, slower wage growth, and subdued hiring, strengthen the case for further rate cuts later this year, even if immediate cuts are less urgent.

The Challenger report came in weak, even when considering the usual layoffs of seasonal workers. Layoff announcements totalled 108.4k, which was the highest number of January layoffs since 2009. Similarly, hiring announcements were subdued, reaching just 5.3k. 

The unemployment rate ticked lower to 4.3% in January from 4.4%, alongside a higher participation rate, offering a glimmer of resilience despite slower overall job creation. Productivity data from Q3 highlighted accelerating productivity growth, which reached 4.9% q/q annualised, and which is already helping to ease labour cost pressures. Labour's share of income fell to an all-time low, while unit labour cost growth slowed significantly to just 1.3% y/y (Chart 3).

Given the strong historical correlation between unit labour costs and inflation, this trend suggests that higher productivity could provide further relief to inflationary pressures, despite nominal wage growth still hovering at 3.8% y/y. In other words, businesses are achieving more output with fewer workers.

While structural challenges and weak hiring persist, the labour market has avoided a sharp downturn, reducing the urgency for immediate rate cuts. The stabilisation, coupled with easing inflationary pressures driven by stronger productivity, supports a cautious approach from the Fed. We expect rate cuts in June and September, followed by a steady hold at 3.00%-3.25% for the remainder of 2026 and 2027.

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