The Decisive | Season 5 Ep.9 - Cooling, Not Crashing: Analyzing the US Labor Market

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Kristen Hallam:

You're listening to The Decisive Podcast: insights and analysis to empower confident decision-making. Hello and welcome to The Decisive Podcast. I'm your host, Kristen Hallam. In this episode, taken from a February 10th client webinar, S&P Global Market Intelligence economist Juan Turcios addresses key questions about the US labor market. Juan walks us through a labor market that's softening in visible, measurable ways, with payroll growth slowing dramatically compared with the post-pandemic boom and job gains becoming increasingly concentrated in a handful of sectors. At the same time, we unpack what a rising unemployment rate really signals right now. Not just cooling demand for workers, but also a labor supply story shaped by demographics, participation, and immigration. We also get into the policy and people dynamics behind the data, how changes to immigration enforcement and border flows can ripple through labor force growth, and why an aging population makes “back to normal” a moving target.

From there, Juan connects the dots between lower job openings, fewer hires, and shifting employer behavior, where companies may be choosing to do more with the workers they already have. That brings us to productivity, what recent productivity gains might mean for wages and growth, and how this all fits into a surprisingly resilient GDP outlook, helped along by fiscal tailwinds like tax cuts and federal spending. And of course, we tackle the wildcard: AI. Is it a productivity accelerant, a hiring slowdown catalyst, or something that reshapes jobs more quietly over time? Juan breaks down what we can say now, what we can't, and what to watch as businesses test AI's real capabilities. Finally, we end with a crucial reality check. How reliable is the labor market data we're all reacting to? With survey response rates falling and non-response bias becoming a bigger concern, we explore why the monthly jobs report may be less definitive than it looks and why uncertainty itself is becoming part of the story. If you want a clear-eyed, practical guide to where the U.S. labor market stands and what the next few years could look like, this episode is for you.

Let's listen to what Juan has to say.

 

Juan Turcios:

I'll take a quick dive into the current state of U.S. labor markets. In short, we expect that the labor market will bend but not break, right? So, to set the context, no doubt there has been a noticeable softening within the U.S. labor market. Payroll gains have slowed from an average of 380,000 jobs added per month in 2022 to an average of just 49,000 over 2025. And indeed, in the second half of 2025, payroll gains were essentially flat. So tomorrow we will get the January employment situation report, and this was delayed. It was supposed to be released last Friday, but this is an important report because it will include the annual benchmark revisions.

So we expect that these revisions will mark down job growth figures in 2025. And that the updated payroll figures will show that only a handful of major industries have been adding jobs as of late, chiefly concentrated in healthcare, in the healthcare sector. The unemployment rate has moved up since a low, a cyclical low of 3.4% in 2023. It's currently at 4.4% in December, so that's one full percentage point above the cyclical low. The unemployment rate is the key indicator about, you know, the current state of the labor market, especially because of slowdowns in both the demand and supply for labor that are difficult to measure. So, turning to that point, from the supply side, part of the slowdown in labor markets is stemming from the supply side, and labor force growth has slowed for two main reasons. First, there is the immigration policy, which underwent a swift shift in 2025. Crossings at the southwest border of the U.S., which were elevated from 2022 through the first half of 2024, have slowed dramatically.

In addition, deportations have picked up in 2025, but to what extent is difficult to gauge at the moment. So this is one of those things that remains a big outstanding unknown. The slowing pace of international immigration slows down overall population growth and importantly, it slows down the labor force growth. So secondly, and it hasn't been getting as much press lately, but labor, the labor force participation rate did rebound sharply after the sharp decline following the pandemic, but has now begun to level off, and we expect it will drift downward due to demographic drivers. So in general, the U.S. population is aging, and older cohorts have a lower level of participation in the labor force than younger cohorts. This demographic trend also in part explains the seemingly robustness of employment gains in the healthcare sector that was mentioned earlier. As the older cohorts become a larger portion of the population, more spending will be allocated to healthcare services.

So what does this imply? The slowing pace of labor force growth affects what is known as the breakeven rate of employment gains. So just a simple explanation is that the breakeven rate of employment gains is traditionally defined as the amount of monthly job gains necessary to keep the unemployment rate stable. That is to keep the unemployment rate unchanged from month to month. Now, this rate in part depends on the rate of growth of the labor force, right? And as we’ve just seen, the labor force growth has slowed. So, estimates of the current breakeven employment gains have also come down. In October, the Dallas Fed estimated that breakeven employment payroll gains to be about 30,000. And in our internal estimates, we estimate a similar number, which is about 33,000 gains per month necessary.

Yes, payroll gains have slowed, but so have the number of jobs that need to be created to keep the unemployment rate stable. Turning briefly to the demand side, the demand for labor has declined. Job openings, which are often called vacancies as well, fell to 6.5 million in December, which is the lowest level since September 2020, and were down nearly by 1 million over 2025. So, firms have reduced their pace of hiring as well. The hires rate was 3.3% in December, which is the latest reading, and that's down from 4.1% at the beginning of 2023. And this is just low by historical standards. So possible explanations for the downgrade in hiring, there's a few, right? So lingering uncertainty surrounding tariffs, that can still be making undertaking decisions to hire a bit more difficult.

There was a surge in post-pandemic hiring that took place, especially in the tech sector and in transportation and warehousing that might still be unwinding. And in addition, from the employees' side, employees are currently hanging onto their jobs. So, the quits rate was 2.0% in December, and that is lower than the pre-pandemic average of 2.3% over 2019. So, this implies that there simply is less need to hire replacement workers from the side of firms. One often-cited measure of market tightness is the ratio of vacancies, to the number of unemployed, and this ratio was 0.87 in December, and that's the lowest reading since March 2021 and is down from a reading of 2.0 in mid-2022. So that's been a substantial softening as well that we can see. While firms are in no rush to hire, as we can tell by the low hires rate, they have also not engaged yet in large layoffs. So, the layoffs rate has ticked up from, let's say, 2 years ago where it was historically low, but is not particularly high and not showing any big signs of worry emerging from that indicator, although it has ticked up a bit.

Instead, what firms seem to be doing is extracting increased productivity from their existing workforce. So productivity growth rose from 1.9% to 2.3% in 2025 on a four-quarter basis. And this has been dubbed and termed, and we also referred to this as, this is essentially that low hire-low fire economy. That currently describes the U.S. labor market pretty well. So what do we expect? First, it's important to note that despite a softening in labor markets over 2025, U.S. GDP growth remained resilient. Our latest forecast, which we published on February 6th, shows that our growth outlook still remains solid going forward.

We estimate that U.S. GDP grew at 2.2% on a year-over-year basis in 2025 and will be followed by 2.7% growth in 2026 and 2.0% growth in 2027. The recent weakness in labor markets does raise some concerns and we are monitoring it, and it does have an effect on how we view our outlook, just in general, and it does raise concerns specifically about the growth of labor income. But you have to remember that this is in the context of disposable personal income being boosted by a tax cut, which was included in the One Big Beautiful Bill Act, which was passed last year. In addition, that same act also included a boost to federal government expenditures, which also acts as a tailwind to growth over the near term. So, the unemployment rate rises modestly in our forecast, but broadly remains low. It's peaking at 4.7% in mid-2026 before gradually starting to move down. While we do not see much job growth, especially relative to the robust payrolls compared to, let's say, previously to 2025, a low unemployment rate does mean that most folks who want jobs have jobs.

And these elevated productivity gains suggest that there is going to be room for labor to bargain for higher real wages in the near future. Finally, just to touch upon a few quick uncertainties that we're keeping an eye on. As I mentioned before, we do know that the net international migration took a big dive in 2025, but we do not know exactly how many migrants entered or how many people left the country, especially when with regards to deportations and self-deportations. So, this is something that we'll keep an eye up and see if better estimates come online. Second, and this is probably relevant for a lot of people, the impact of AI, right? So, the impact of AI is hard to discern in the labor data. Over the long term, we do expect that AI will make workers more productive. Over the medium term, could it have a displacement effect? That is hard to say. Kind of by and large, you can either think of AI as kind of being either labor-replacing or labor-augmenting in terms of for workers.

So in our forecast, we do not include any kind of material labor replacement going on by AI. And we think it's possible that businesses might slow the pace of hiring as they evaluate kind of what task AI can be performed. And maybe some of that is what we're seeing in the hiring rate, but it's tough to extract that signal, given that there is also this increase in tariffs and given that there was this overhiring. So, I wouldn't be as quick to extract the signal that this is being just an AI phenomenon right now, but it's possible. And that's why we're saying it's too early. But over the longer term, in our forecast, we basically show that workers become more productive as they have more access to increased computer stocks, increased software, increased R&D, which is, you know, the AI stuff. And within our modeling, basically the real wage is ultimately determined by marginal productivity or by productivity of workers, right? So, this increase in productivity over time will give workers bigger bargaining power to bargain their wages up. So, we are still early in this story and we'll be watching closely any developments.

Finally, one concern that is often overlooked is that survey response rates for companies and households participating in two critical surveys have fallen over the last 10 years. So, this is for the current employment situation and for the current population survey. So this makes these monthly reports less reliable on a month-to-month basis. And it could be a serious problem if non-respondents are in some substantial way different from respondents to these surveys. And this is known as a non-response bias. So while we expect the labor markets will remain relatively resilient over 2026, we are keeping a close eye on labor market developments as we assess our economic outlook.

 

Kristen Hallam:

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.