Job market’s effect on the economy

January’s employment report delivered a welcome upside surprise. The U.S. economy added 130,000 jobs in January, and the unemployment rate held slipped to 4.3%, according to the U.S. Bureau of Labor Statistics (BLS). Job gains showed up in health care, social assistance and construction, while the federal government and financial activities lost jobs. ¹

That stronger headline arrives after a softer finish to last year. In December, the U.S. economy added 48,000 jobs, and the unemployment rate sat at 4.4%, reflecting slower momentum than earlier in 2025. ¹ January’s improvement helps reinforce that the labor market is still moving forward, even if the pace remains uneven.

A positive surprise, but revisions are the bigger story

The more important development may be what changed behind the scenes. Our analysis notes that while January’s 130,000 gain was encouraging, the BLS revisions imply 2025 average monthly job gains were revised down to about 15,000, a sharp step down from 2024’s 122,000 average monthly pace.  ¹ That contrast highlights why investors may see the labor market as stable today but less predictable looking ahead.

Even so, the composition of hiring still offers something constructive to build on. Health care and social assistance continue to add jobs, and construction has also contributed to gains, suggesting parts of the economy are still expanding. At the same time, job losses in federal government and financial activities point to areas where employers appear more cautious.

Wage growth continues to support household spending power

Despite cooler hiring, wage growth remains a key support for households. Average hourly earnings for total private payrolls rose 3.7% year over year in January, based on the BLS estimates. ¹ Steady paychecks can help consumers maintain spending, even when job creation slows. Hourly earnings continue surpassing inflation rates, providing more spending power to consumers in aggregate.

At the same time, wage gains have not surged in a way that re-inflames price pressures. That balance—income growth that supports demand without overheating—often helps markets stay focused on growth rather than fear. It also means the labor market can soften without immediately undermining the consumer backdrop.

Job openings signal a labor market that is cooling through “less churn”

Job openings data suggest the labor market is moving toward a more restrained setting. As of December 2025, job openings totaled 6.5 million while unemployed persons were 7.5 million, a gap of nearly one million—a notable shift from the earlier “worker shortage” era, in the wake of the recent pandemic. ² The same report shows hires and total separations were roughly 5.3 million each, which is consistent with a “freeze” dynamic in the labor market rather than expansion. 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.” That theme fits a market where employers appear hesitant to accelerate hiring, yet still reluctant to let trained workers go.

Layoffs remain contained, even as some indicators tick higher

Weekly jobless claims still help frame whether weakness is spreading into layoffs. 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.

Recent readings still look consistent with that idea, even if week to week numbers move around. In the week ending February 6, non-seasonally adjusted initial jobless claims fell slightly to 248,000 below average levels starting the past 3 years. ³ Meanwhile, layoffs increased in January according to Challenger, Grey and Christmas, but the three-month total of 215,000 is in line with the 26-year average. ⁴ That combination points to a labor market that is cooling more through slower hiring and fewer openings than through widespread job cuts.

What a cooling labor market could mean for interest rates

Investors follow labor data closely because it often influences the Federal Reserve’s decisions, as one of its key Congressional mandates is to promote full employment. A softer labor market can encourage the Fed to trim borrowing costs, which can matter for everything from mortgages to business investment. 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 more quarter-point cuts in 2026. ⁵

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.” When the job market cools in an orderly way, it can create room for lower rates without requiring a sharp economic downturn.

Policy crosscurrents still matter for the labor outlook

Looking ahead, fiscal policy could amplify or soften today’s labor signals, especially through tariffs and immigration. Effective tariff rates may approach 14%, up from current levels near 12% and 2–3% in recent years, which can push import costs higher and affect how quickly inflation cools. ⁶ 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 Rob Haworth, who flags construction as a potential pressure point. In other words, the labor market can look “stable” in the aggregate while still tightening in pockets where worker supply is constrained. That’s one reason the forward path may feel less certain even after a better-than-expected January headline.

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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.