U.S. Employment Shows Signs of Cooling as Fed Remains Split
Consensus estimates project unemployment to have edged down to 4.5% from 4.6% in November. Labor market strength or weakness is key.
Quick overview
- The U.S. labor market is showing signs of cooling, with weaker-than-expected job creation reported for December and a slowdown in hiring for November.
- The December ADP employment report indicated a growth of only 41,000 private-sector jobs, falling short of expectations, while job openings hit their lowest level in over a year.
- The upcoming official employment report is anticipated to show a slight decrease in the unemployment rate, with projections of around 70,000 new nonfarm payroll jobs.
- The Federal Reserve faces internal divisions regarding future interest rate policies, influenced by the current labor market conditions and economic uncertainties.
The latest labor market data are carrying more weight than usual after Federal Reserve Chair Jerome Powell urged caution last month regarding further interest rate cuts.
The U.S. labor market once again showed signs of cooling, with private surveys pointing to weaker-than-expected job creation in December and official data revealing a slowdown in hiring during November. The developments come amid increasingly visible divisions within the Federal Reserve over the future path of interest rates, as Chair Jerome Powell enters the final months of his term.
The December ADP employment report showed private-sector job growth of just 41,000 positions, below expectations of roughly 45,000. Employment gains were concentrated entirely in the services sector, while manufacturing jobs declined. Following the release, U.S. Treasury yields moved lower.
Specifically, service-sector employment rose by 44,000 jobs, while goods-producing industries shed 3,000 positions during the month. This pattern aligns with the ISM non-manufacturing employment index, also released Wednesday, which rose three points to 52—marking a notable rebound from November, when a revised loss of 29,000 jobs was reported (originally -32,000).
At the same time, job openings fell to their lowest level in more than a year, while hiring slowed further, signaling continued softening in labor demand amid heightened economic uncertainty. According to data from the Bureau of Labor Statistics (BLS), the JOLTS survey showed job openings declined to 7.146 million in November, below the expected 7.648 million and down from 7.449 million in October, which was revised lower by more than 200,000 positions.
The Key Jobs Data Ahead
While Wednesday’s data were anticipated given the recent softening trend in the U.S. labor market, the most important figures are due Friday with the release of December’s official employment report.
Consensus estimates project the unemployment rate to have edged down to 4.5% from 4.6% in November, while nonfarm payroll growth is expected to reach around 70,000 jobs, up from the 64,000 created previously.
November’s unemployment reading marked the highest level in four years, though it was partially distorted by the 43-day federal government shutdown, which also disrupted household survey data collection in October. As a reminder, October’s unemployment rate was not published for the first time since the series began in 1948.
Looking ahead to 2026, the labor market is expected to act as both a headwind and a stabilizing force. Downward pressure stems largely from tariffs, which are placing significant strain on small businesses. Companies with 20 to 49 employees have not generated net job growth over the past two years, as cost-cutting efforts have resulted in near-zero hiring.
At the same time, layoffs remain remarkably low, a trend analysts expect to persist as long as large-cap corporate fundamentals remain solid—which continues to be the case.
The Fed’s Dilemma
Labor market strength or weakness is likely to be the decisive factor shaping future Federal Reserve policy. Weaker-than-expected employment data would likely prompt more rate cuts than the one or two reductions currently projected for this year.
These uncertainties are increasingly reflected within the Fed’s leadership, which is set to meet on January 27–28 amid elevated internal disagreement—particularly as Powell’s term as Fed Chair expires in May.
On Tuesday, Richmond Fed President Thomas Barkin struck a cautious tone, noting that tax cuts, deregulation, and lower interest rates could provide stimulus to the economy this year. However, he emphasized that future policy decisions must balance both sides of the Fed’s dual mandate: keeping unemployment below 4.5% while maintaining inflation at 2% annually.
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