U.S. labor market: Defensive stability in a low-hire, low-fire economy

The U.S. labor market maintains an unusual condition defined by limited job creation and persistently low unemployment – an arrangement that appears stable, but increasingly defensive in nature. This is what former Federal Reserve Chair Jerome Powell has previously described as a “low-hire, low-fire” economy. ¹

One of the clearest signals of this shift is the recent slowdown in payroll growth. From January 2025 through May 2026, job gains have averaged just 40,000 per month. Over that period, the unemployment rate has edged higher, but remains near historic lows.  ²

More recent data suggest that while hiring remains subdued, conditions have shown tentative signs of stabilizing.

“The labor market’s key stabilizing factor is that layoffs remain low,” says Matt Schoeppner, senior economist, U.S. Bank. “As long as job losses remain contained, the labor market can hold in a relatively stable – albeit subdued – equilibrium.” Even so, new job creation has slowed, and employers appear increasingly reluctant to initiate major workforce reductions. In May 2026, the unemployment rate stood at 4.3%. ² “The combination of slower job growth and still-low unemployment reflects a sharp pullback in both labor demand and labor supply,” says Schoeppner. “That leaves the labor market less dynamic and increasingly vulnerable to downside risk.”

Is the jobs market at an inflection point? While it is too early to call a definitive ‘trend’, May delivered another better-than-expected job gains following relatively solid growth in March and April – with job creation averaging a firmer +188,000 over the three-month period – an encouraging development after a prolonged slowdown. “In addition to the stronger jobs gains, businesses have also been hiring more temporary works and maintaining hours for the workers already on their payrolls,” says Beth Ann Bovino, chief economist, U.S. Bank. Hiring temporary workers and sustaining hours typically signals that firms are operating closer to capacity and may need to add permanent staff in the coming months.

Bovino notes that “while there is still some volatility in the data, recent trends suggest the labor market may be shifting modestly toward a ‘more hire, low fire’ state. That points to some stabilization after many months of softness – but it’s too early to call it a sustained reacceleration. We may be in the later innings, but there’s no clear win just yet.”

Slowing job growth reflects changing demographics

While the recent slowdown in job growth may raise concerns, it also reflects longer-term demographic trends. “A notable shift underway is that the number of retirees is rising, fewer babies are being born and net immigration has diminished,” says Bovino. “As a result, the ‘breakeven’ pace of job growth needed to maintain a stable unemployment rate has declined considerably from past cycles.” At the same time, a shrinking pool of available workers, driven by retirements, is pushing up the U.S. age-dependency ratio – the population aged 65 and older as a share of the working age population. Bovino notes that as this ratio rises, it places increasing strain on the government finances by reducing tax revenues relative to the cost of retiree benefits ("From the Desk of Beth Ann Bovino," Feb. 5, 2026). The age‑dependency ratio is expected to rise sharply, nearly doubling from 19% in 2024 to 38% by 2050. Bovino adds that this demographic challenge is “not unique to the United States,” noting that many advanced economies are experiencing similar aging trends.

The “breakeven” employment growth rate – the monthly pace of job creation needed to keep the unemployment rate steady – is a key labor-market benchmark. In recent years, that figure was estimated to be as high as 250,000 new jobs per month, reflecting strong immigration flows and rapid labor-force growth. Today, however, the breakeven rate has fallen sharply and is now closer to zero, with U.S. Bank Economics estimating it in the range of roughly 25,000 to 50,000 jobs per month.³

“The lower breakeven rate helps explains how the unemployment rate can remain in the low 4-percent range even as job creation has settled,” says Schoeppner. “It also underscores a decline in labor market dynamism.” Schoeppner notes while layoffs and discharges remain near historic lows, job openings have steadily declined, fewer workers are voluntarily quitting their jobs, and the hiring rate has fallen to post-pandemic lows. “Taken together, these are classic signs of a low-churn labor market,” he adds.

Job openings flatten out

The labor market continues to adjust to the dramatic shift set in motion by the COVID-19 pandemic. After the economy virtually shut down in early 2020 – temporarily displacing in millions of workers – the recovery that followed was rapid, with job openings far outpacing available workers for an extended period.

That imbalance has since faded. Today, the ratio of job openings to job seekers has returned to roughly one-to-one. This normalization reflects both the Federal Reserve's efforts to cool demand as well as a change in employer behavior, as firms have grown more cautious about hiring while prioritizing their existing workforce over recruitment. Schoeppner warns that what looks to be labor market stability on the surface may mask underlying fragility. “Even a modest shock could have an outsized impact on unemployment, growth, and policy decisions,” he says. More recent JOLTS data suggest openings may be leveling off after a prolonged decline, consistent with a broader stabilization in labor demand at lower levels.

Potential signs of labor market fragility

Concerns about labor market fragility closely tied to the still‑subdued hiring environment. “So far, persistently low layoffs have served as a stabilizing force,” says Schoeppner. “When layoffs remain contained, even modest job growth can be enough to keep the labor market on steady footing.” Schoeppner warns, however, that even a modest uptick in layoffs could push unemployment higher – highlighting the market’s growing sensitivity to downside shocks even as conditions appear broadly stable today.

Another potential sign of labor market fragility is the pace at which workers choose to quit their jobs. While the quit rate surged in 2021 and 2022 during the post‑pandemic recovery, it has since leveled off.² “When the quit rate is high, workers are more confident that they can find other employment,” says Bovino. “When it trends lower, it reflects greater caution about job opportunities.” She adds that today’s environment has produced more so-called “job huggers” – workers who are reluctant to leave their current positions for fear that better options may not be available.”

What’s driving the U.S. labor market slowdown

The current labor market slowdown reflects a combination of structural and cyclical forces, including:

• Immigration policy shifts. Tighter immigration controls have reduced labor force growth, lowering the breakeven pace of job gains and limiting labor market dynamism.
• Tariff-related cost pressures. Higher tariffs implemented by the Trump administration have increased costs and elevated uncertainty, discouraging or delaying hiring – particularly in goods-related sectors.
• Federal spending cuts. Reductions in federal government spending have resulted in large layoff announcements in some areas, creating localized shocks and weighing on confidence among federal contractors. An extended federal government shutdown would likely amplify these fiscal headwinds by further disrupting operations and sentiment.
• Softening consumer spending. Lower- and middle-income households face mounting affordability pressures, constraining discretionary spending and dampening demand-driven hiring.
• Artificial intelligence impact. Demand for some entry-level technology roles appears to be easing as firms reassess staffing needs amid rapid adoption of AI‑driven tools.

Taken together, these forces point to an increasingly brittle labor market, where stability depend heavily on continued restraint in layoffs rather than renewed hiring momentum.

Layoffs: the last defense

The primary firewall between today’s soft patch and a broader downturn is continued restraint in layoffs. Firms remain reluctant to cut headcount after experiencing the costly post-pandemic scramble to rehire. “Businesses learned that mass layoffs can be expensive to reverse,” says Schoeppner, “Instead, many are adjusting at the margins – through hiring freezes, reduced hours, and cuts to temporary help.”

Together, these behaviors point to a labor market operating in a state of defensive stability – one in which employers prioritize protecting existing payrolls rather than expanding them. At the same time, moderating wage growth and a recent decline in real disposable income point to some erosion in household purchasing power. With savings rates trending lower, consumers appear to be relying more on current income to sustain spending, leaving less of a buffer should labor market conditions soften.

Schoeppner notes that this caution reflects how employers are adapting to softer labor demand. “Many firms are stretching their existing workforce through longer hours and higher productivity expectations rather than reducing headcount,” he says. “Lower turnover has helped keep net job growth modest while holding the unemployment rate relatively stable.”

Recent data reinforce this picture. Weekly initial jobless claims have hovered just above 200,000 throughout the first half of 2026, signaling a still-subdued layoff environment.⁴ Continuing unemployment claims, which rose following the government shutdown in late 2025, have since trended lower.

At the same time, the hiring rate is trending near levels typically seen during recessions. Any shock – such as weakening demand, fiscal disruption, or a decline in confidence – that forces broad cost-cutting could push layoffs higher. History suggests that once layoffs begin to climb, they often accelerate as firms respond to one another’s actions. In the months ahead, the durability of the “low fire” labor market dynamic may be tested.

A new economic variable

Even amid subdued hiring, the economy appears positioned to avoid a recession in the near term under the current low-layoff environment. The Federal Reserve’s decision to cut the federal funds target rate three times in late 2025 underscored its growing focus on labor market fragility. Since then, however, inflation concerns have resurfaced following the U.S./Israel conflict with Iran, potentially pressuring the Fed to hold rates steady for longer. That shift introduces a new source of economic risk.

“The concern is that higher – and often volatile – energy prices could feed into core prices,” says Bovino. “If that keeps interest rates elevated, businesses may become more cautious about investment, which could weigh on labor demand.”

Schoeppner adds that while higher gas prices may initially pressure corporate profit margins, they do not always translate directly into staffing cuts. “Energy costs eventually affect transportation, manufacturing, logistics, and warehousing,” he notes. “If those pressures intensify, they could lead to softer labor demand in energy‑sensitive sectors.”

Bovino also points to industries such as fertilizers and plastics, which face higher input costs due to disruptions in oil shipments. “This brings the discussion back to core inflation risks,” she says. “If those pressures materialize, the Fed may need to remain on hold for longer, with less scope to ease policy in the near term.” In that environment, the balance of risks could shift away from additional rate cuts and toward the possibility that policy remains restrictive – or even tightens – if inflation pressures persist.

Could artificial intelligence (AI) alter the labor market landscape?

There has been an extensive discussion about whether artificial intelligence is beginning to replace jobs in some industries. Schoeppner notes that with overall job creation already relatively flat, it remains unclear whether AI is materially affecting headline hiring figures. Instead, he views AI implementation less as an immediate job-destroying shock and more as a shift in job composition and productivity.

“Employers increasingly appear to be backfilling roles rather than approving large numbers of new positions,” says Schoeppner. “Over time, AI is more likely to substitute for incremental labor demand than to directly replace existing workers.” To date, the most visible effects have been concentrated in clerical and administrative functions, particularly in select white-collar, entry-level roles.

While the transition to broader AI adoption may cause some near-term adjustment, Bovino is more optimistic about the long-term implications. “As AI is implemented, it will ultimately create new jobs, new businesses and entirely new industries,” she says. “That said, the adjustment is likely to present challenges in the near term.

An entrenched labor market environment

In the near term, the economy appears increasingly entrenched in a low-hire/low-fire labor market environment. Layoff trends therefore warrant close monitoring, as persistently modest levels of job losses have played a central role in keeping the unemployment rate stable.

At the same time, while the broader economy still appears resilient, renewed inflation risk tied to higher oil prices – driven by an escalation of tensions in the Middle East – could spill over into other parts of the economy. Such pressures may limit the Fed’s ability to ease monetary policy though rate cuts, constraining support for both economic growth and the labor market. As a result, the labor market may appear steady on the surface but is increasingly characterized by low churn, limited income growth, and reduced shock absorption capacity.