Labor market mixed bag

Bottom line

Nonfarm and private payrolls were much weaker than expected in December — with sizable downward revisions in October and November — as the labor market digests federal government layoffs by DOGE, reduced immigrant labor due to deportations and corporate America’s reduced hiring due to the early implementation of artificial intelligence (AI).

In December, nonfarm payrolls rose by only 50,000 jobs (consensus at 70,000, Federated Hermes at 47,000), which was roughly flat with November’s gain of 56,000 jobs (revised down from a preliminary gain of 64,000 jobs). But that was significantly better than October’s much larger-than-expected loss of 173,000 jobs (revised down from a loss of 105,000 jobs). So, October and November collectively experienced a downward revision of 76,000 jobs. 

Private payrolls weren’t much better. In December, they rose by only 37,000 jobs (consensus at 75,000), down from a gain of 50,000 jobs in November (revised down from a preliminary gain of 69,000). But October was revised down sharply from an increase of 52,000 jobs to a final gain of only 1,000 jobs. So, October and November experienced a combined downward revision of 70,000 jobs.

Inflection point? According to the Office of Personnel Management, 317,000 federal employees left their jobs during 2025, many accepting the Trump Administration’s deferred offer to retire or resign during the DOGE purge last year. The layoffs became effective at the end of the federal government’s fiscal year on September 30. It appears that the surge is completed, as we added 2,000 federal government workers in December after 3,000 in November.

Similarly, the negative labor market impact from the mass deportation of undocumented immigrants also appears to be slowing. In December 2025, the participation rate for foreign-born workers increased from 65.7% in December 2024 to 66.3% last month, while the number of employed foreign-born workers increased by 1.2% over the past year. In contrast, the native-born participation rate slipped from 61.4% in December 2024 to 61.2% last month, though the number of employed native-born workers increased by 1.6%. Perhaps many large technology companies have signed on to President Trump’s new $100,000 fee for H-1B visas to hire highly skilled workers. Moreover, agriculture, construction and hospitality are three important industries that rely heavily on immigrant labor.

Flip side of the coin positive The government was unable to collect data on household employment (an important leading employment indicator) due to the shutdown in October, but it rose sharply by 232,000 workers in December. The size of the civilian labor force shrunk by 46,000 people in December, and the number of unemployed people declined by 278,000 last month.

As a result, the unemployment rate (U-3) declined to a three-month low of 4.4% in December, down from 4.5% in November, though still well above April 2023’s 53-year low of 3.4%. The Fed expected U-3 to end last year at 4.5% and ease to 4.4% by the end of 2026. The labor impairment rate (U-6) fell sharply to 8.4% in December from a four-year high of 8.7% in November, well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate eased to 62.4% in December from a six-month high of 62.5% in November, up from a cycle low of 61.4% in September 2020. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

More good news on wages Average hourly earnings leapt by a faster-than-expected pace of 3.8% year-over-year (y/y) in December, up from 3.6% in November. The recent surge in productivity may have something to do with the increase in wages, while inflation continues to decline. Core CPI has declined to a four-year low of 2.6% y/y in November 2025. Productivity declined by 2.1% in last year’s first quarter, but it soared by 4.1% and 4.9% in last year’s second and third quarters, respectively.

Fed on hold in January Over the past eight months, nonfarm payroll gains have increased by an average of only 21,000 jobs per month, including jobs losses in June, August and October, the weakest pace of job creation since the depths of the Covid pandemic. That compares with average monthly payroll gains of 123,000 over the first four months of 2025 and 168,000 during 2024. Private payrolls have added an average of 47,000 jobs over the past eight months, compared with 108,000 jobs from January through April 2025 and an average of 130,000 over the course of 2024.

Despite weak payrolls, household employment was solid in December, wages grew at a healthy rate and unemployment declined. As a result, we still expect the Fed to pause at its next policy-setting meeting on January 28 to digest its three recent cuts. But by its next meeting on March 18, the federal government should have caught up with last year’s data backlog, and the Fed will have payroll reports in hand from January and February, which could put a March rate cut on the table.

Chair Jerome Powell’s term expires in May 2026, so we expect more dovish leadership at the Fed, perhaps resulting in two more cuts in this year’s second half. All in, we’re still expecting a total of three quarter-point cuts in 2026, which would take the terminal value of the fed funds rate down to 3.0%.

Other key labor-market indicators also mixed:

• Initial weekly jobless claims wonky This high-frequency leading employment indicator recently declined to 208,000 for the New Year’s week, to 200,000 for Christmas week, and to 192,000 for Thanksgiving week. Ignore wonky holiday-week data. The December survey week posted a gain of 224,000, which appears reasonable. 
• ADP private payrolls rebound December posted a gain of 41,000 jobs, versus a loss of 29,000 jobs in November. Workers who changed jobs last month saw their wages rise by 6.6% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest boost of 4.4% y/y, well below the peak of 7.8% in September 2022. 
• Challenger, Gray & Christmas layoffs slow Companies announced job cuts of more than 35,500 in December, half of November’s levels and 8% less than year-ago levels.
• Job Openings & Labor Turnover Survey (JOLTS) declines November job openings fell to a weaker-than-expected 14-month low of 7.146 million, down 4.1% from 7.45 million in October, and 41% below a record 12.182 million job openings in March 2022. The rate of job openings declined to a three-month low of 4.3% in November, well below a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker declined to a nearly five-year low 0.9 in November, down sharply from a peak of 2.0 in March 2022. The quits rate ticked up to 2.0%.
• K-shaped labor gap shrinks The unemployment rate for highly educated workers ticked down to 2.8% in December, up from September 2022’s cycle low of 1.8%. But the rate of unemployment for less-educated workers plunged to 5.6% in December from 6.8% in November, although still well above its 31-year low of 4.4% in November 2022.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 6,000 jobs in December for the eighth consecutive month, for the 11th time in 12 months, and for the 41st month of the past 44. 
• Manufacturing lost 8,000 jobs in November for the eighth consecutive month. 
• Construction lost 11,000 jobs In December, after adding 22,000 jobs in November. 
• Retail cut 25,000 jobs in December for the third consecutive month. Christmas spending was solid, but we expect January and February to be soft, before a strong rebound in March. 
• Leisure & hospitality soared by 47,000 jobs in December, after losing a modest 3,000 jobs in November and adding 33,000 jobs in October.