Job market’s effect on the economy

The Bureau of Labor Statistics’ December 2025 Employment Report shows the job market still moving forward, but with less horsepower than earlier in the year. In December, the U.S. economy added 50,000 jobs, a bit below expectations, and that slower print fits a broader 2025 downshift in hiring momentum. ¹

Payroll growth slowed sharply through 2025

Employers kept adding jobs in 2025, but they did it at a much slower pace as the year progressed. From May through December, hiring averaged 12,000 jobs per month, compared with 123,000 from January through April, signaling that demand for labor cooled in a meaningful way. ¹ That deceleration can feel unsettling in headlines, yet it often represents a healthier pattern alongside stable layoffs and easing wage pressures.

Unemployment dipped as employers held onto workers

Even with slower job creation, the unemployment rate moved lower, and that detail carries weight for both markets and confidence. December’s unemployment rate fell to 4.4%, down from a revised 4.5% in November, reflecting a labor market where employers largely chose worker retention over broad staff reductions. ¹ When the unemployment rate stays contained, consumers typically maintain spending power, which can support corporate revenues and keep the economic backdrop constructive.

Job openings remain high, matching job candidates remains hard

The November 2025 Job Openings and Labor Turnover Survey (JOLTS) suggests demand for workers persists even as hiring cools. Job openings sit around 7.1 million, still elevated, while roughly 7.5 million Americans are looking for work—numbers that imply the market is moving toward balance but hasn’t fully resolved frictions. ² “Companies are searching for people but seem to have difficulty finding the right candidates,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “Businesses are hanging onto existing employees while looking for more of them.”

Labor supply: Participation drifted lower, but wages cooled

Labor supply remains a quiet swing factor because it shapes how “tight” the market feels even when hiring slows. The labor force participation rate slipped 0.1% to 62.4% in September, below the recent high of 62.8% in November 2023, which can restrain growth by limiting how quickly employers can staff up. ¹ “Shrinking labor force participation is a negative sign and aligns with an aging workforce,” says Haworth. “But less available labor has not yet translated to higher labor costs.” Average hourly earnings rose 3.8% year over year in December, slowing from 4.0% previously, which helps relieve inflation pressure and can support profit margins. ¹

Jobless claims reinforce a “slow hiring, slow firing” market

Weekly initial jobless claims offer a more real-time read on whether layoffs are spreading, and they continue to look orderly. According to Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, “Initial jobless claims remain low and consistent with seasonal norms, signaling that employers are not actively cutting staff.” He adds, “When combined with recent payroll figures, this suggests we’re in a ‘slow hiring, slow firing’ environment,” a setup that often supports steady consumer spending even as hiring normalizes.

Softer labor market can open the door to interest rate cuts

Investors watch labor data closely because it shapes the Federal Reserve’s monetary policy and influences borrowing costs, credit conditions, and bond yields. The Fed reduced its federal funds target rate by 0.75% over the final three meetings of 2025 and emphasized two-sided risks to inflation and employment while markets price meaningful odds of two to three more cuts in 2026. ³ Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group, expects more cuts: “Worries around persistent inflation have kept interest rates elevated,” says Hainlin. “However, recent data clearly indicates a softening labor market, increasing the odds of multiple rate cuts in 2026.”

Tariffs and immigration could reshape labor and inflation

Looking ahead, policy could amplify or soften today’s labor signals, especially through tariffs and immigration. Effective tariff rates now approach 12%, up from 2–3% in recent years, which can push import costs higher and affect how quickly inflation cools. ⁴ Investors also monitor stricter immigration policies proposed by the Trump administration because reduced labor supply can tighten conditions in specific sectors. “People subject to deportation, in many cases, have jobs, so if they leave, other workers will need to step into those jobs,” says Haworth, who flags construction as a potential pressure point.

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FAQs

What is the job market?

The job market connects people looking for work with employers searching for talent. A strong job market signals a healthy, growing economy, as companies add jobs and compete for workers. When unemployment rises and job growth slows or declines, it often points to an economy that’s losing momentum.

Why is the unemployment rate important?

The U.S. Bureau of Labor Statistics tracks the unemployment rate every month, giving us a clear view of the nation’s economic health. A lower unemployment rate usually means the economy is strong. This rate draws close attention because it shows how many people are actively seeking work. However, it doesn’t count those who have stopped looking or consider themselves out of the workforce.

How does the economy affect unemployment?

When unemployment rises, it signals that the economy may be weakening. People often cut back on spending if they worry about losing their jobs, which can slow the economy even more. On the other hand, low unemployment typically reflects a robust and expanding economy.