Positive inflection point for employment?
US labor market was strong across the board in January.
Bottom line
Despite brutal winter weather and lingering concerns over the negative impact from tariffs, Artificial Intelligence (AI), immigrant deportations and the downsizing of federal government workers, nonfarm and private payrolls in January were surprisingly robust. Moreover, household employment more than doubled in January to a gain of 528,000 jobs, driving the unemployment rate down for the second consecutive month to a five-month low of 4.3%.
While this strength likely quells investor handwringing over decidedly weak labor-market data from ADP, initial weekly jobless claims, Challenger layoffs and the Job Openings and Labor Turnover Survey (JOLTS) in recent weeks, it also reduces the likelihood of another interest rate cut from the Federal Reserve this spring.
This week, the Bureau of Labor Statistics (BLS) said that nonfarm payrolls in January rose by a much stronger than expected 130,000 jobs (consensus at 65,000, Federated Hermes at 59,000), more than double December’s gain of 48,000 jobs (revised down from a preliminary gain of 50,000) and November’s final gain of 41,000 jobs (revised down from a preliminary gain of 56,000 jobs).
October trough? This three-month performance was significantly better than October’s loss of 140,000 jobs — which may mark the bottom of the current labor-market cycle — due to the outsized loss of 166,000 federal government workers. According to the Office of Personnel Management, 327,000 federal employees left their jobs during fiscal 2025, many accepting the Trump Administration’s deferred offer to retire or resign during the Department of Government Efficiency (DOGE) purge last year. The layoffs became effective at the end of the federal government’s fiscal year on September 30.
Private payrolls demonstrated even more strength in January, rising by 172,000 jobs (consensus at 68,000), more than double December’s gain of 64,000 jobs (revised up from a preliminary gain of 37,000) and November’s final gain of 72,000 jobs (revised up from a gain of 50,000 jobs). In sharp contrast, October added only 13,000 private jobs.
Benchmark revisions In January, the BLS completed its annual benchmark revision of its Quarterly Census of Employment and Wages. The revision resulted in a decline (not-seasonally-adjusted) of 862,000 jobs through March 2025, slightly better than the preliminary estimate of a loss of 911,000 jobs.
Weather or not? Winter storm Fern dumped a foot or more of snow through much of the Midwest and Northeast during the weekend of January 24-25, and temperatures were subzero in many areas for the longest stretch in 60 years. But the survey week ended on Jan. 17, so the weather’s impact on the January jobs report was not as damaging as expected. The Labor Department said 217,000 people could not work this January because of the brutal winter weather, compared to a 10-year average of 342,000 such workers during previous Januarys. In addition, 291,000 people were forced to work part-time last month because of the weather, compared with a 10-year average of 1.004 million workers.
Immigrant labor trends improve For the second consecutive month, the labor market impact from the mass deportation of foreign-born workers improved. In January 2026, the participation rate for foreign-born workers increased to 66.7% from 66.0% in January 2025, while the unemployment rate for foreign-born workers slipped a tick to 4.5%. In contrast, the number of employed native-born workers increased by 0.6% over this period, but the native-born participation rate declined from 61.4% in January 2025 to 61.2% last month, while the unemployment rate rose from 4.3% to 4.7%.
Household employment soars, unemployment & labor impairment rates fall and participation rate rises Perhaps the most promising aspect of the January jobs report was the surge in household employment by 528,000 workers — more than double December’s gain of 232,000 workers. As a result, the unemployment rate (U-3) declined for the second consecutive month to a five-month low of 4.3% in January, down from 4.4% in December and 4.5% in November, although 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 once again to 8.0% in January, down from 8.4% in December and a four-year high of 8.7% in November, though still well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate climbed a tick to an eight-month high of 62.5% in January, 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.
Wages and hours worked rise Average hourly earnings leapt by a faster-than-expected pace of 0.4% month-over-month (m/m) in January, up from a 0.1% gain in December. Wage growth held steady at a 3.7% year-over-year (y/y) pace in January. The spike in productivity may have something to do with the increase in wages, while inflation continues to decline. The Core Consumer Price Index declined to a four-year low of 2.6% y/y in December 2025. Productivity declined 2.1% in last year’s first quarter, but it soared 4.1% and 4.9% in last year’s second and third quarters, respectively. Hours worked ticked up in January to 34.3. Each 0.1 change is the equivalent of adding an estimated 350,000 workers to the economy.
K-shaped labor gap shrinks again The rate of unemployment for highly educated workers rose a tick to 2.9% in January, up from September 2022’s cycle low of 1.8%. But the unemployment rate for less-educated workers plunged to 5.2% in January from 5.6% in December and 6.8% in November, though still above its 31-year low of 4.4% in November 2022.
Other key labor-market indicators were decidedly negative:
- Initial weekly jobless claims This high-frequency leading employment indicator recently leapt to a two-month high of 232,000 for the week ended January 31.
- ADP private payrolls January’s report slumped to a three-month low of 22,000 jobs, versus a gain of 37,000 jobs in December. Workers who changed jobs last month saw their wages rise by 6.4% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest boost of 4.5% y/y, well below the peak of 7.8% in September 2022.
- Challenger, Gray & Christmas layoffs Companies announced job cuts of more than 108,000 in January, triple December’s levels and 118% higher than year-ago levels. This marked the largest number of job cuts in any January since 2009.
- JOLTS December job openings fell to a much weaker-than-expected five-year low of 6.542 million, down 5.6% from 6.928 million in November, and 46% below a record 12.182 million job openings in March 2022. The rate of job openings declined to a more than five-year low of 3.9% in December, well below a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker held steady at a five-year low of 0.9 in December, down sharply from a peak of 2.0 in March 2022. The quit rate remained at 2.0%.
Sector details positive:
- Temporary help (an important leading employment indicator) added 9,000 jobs in January for the third consecutive month, with revisions taking December (up 6,000 jobs) and November (up 14,000 jobs) into the black, after six consecutive months of job losses.
- Manufacturing added a stronger-than-expected 5,000 jobs in January (consensus loss of 7,000 jobs expected), reversing eight consecutive months of job losses.
- Construction added a whopping 33,000 jobs in January for the third time in five months.
- Retail added a paltry 1,000 jobs in January, after posting consecutive losses in October through December, which marked a disappointing Christmas. We expect January and February to be soft, before a strong rebound in March.
- Leisure & hospitality added only 1,000 jobs in January, after adding a strong 45,000 jobs in December and 41,000 in October.
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