Evidence is piling up of a weakening labor market that could dampen an otherwise sanguine U.S. economic outlook this year while also paving the way for more interest rate cuts. This week saw a raft of jobs-related data — none of it good: Private hiring was nearly flat in January, according to ADP , which reported net growth of just 22,000 jobs. Job openings plunged to a level not seen since September 2020 and were down by nearly one million in just a two-month span. Planned layoffs and hires at big companies in January hit their lowest point for the month since 2009, while the U.S. economy was still mired in the financial crisis. Employment indexes in both the services and manufacturing sectors showed hiring at a standstill. Together, the data points buttress worries from some Federal Reserve policymakers that the coast is far from clear for the labor market and may require more policy support — in the form of interest rate reductions — if the current state of play persists. “This does not remotely look like a healthy labor market,” Fed Governor Christopher Waller said in a statement explaining his support for a cut at the central bank’s January meeting. “I have heard in multiple outreach meetings of planned layoffs in 2026. This indicates to me that there is considerable doubt about future employment growth and suggests that a substantial deterioration in the labor market is a significant risk.” Markets largely expect the Fed to be on hold until June, though a number of Wall Street economists think indications from policymakers in December that they see only one rate cut this year aren’t realistic. Mark Zandi, chief economist at Moody’s Analytics, is part of a sizeable group that expects as many as three moves this year as the Fed is forced to get more aggressive in defending the full employment side of its dual mandate. “The soft labor market is the key threat to the economy this year,” he said. “It’s very fragile. We’re not creating any jobs.” To be sure, none of the data is dire, either. Though initial jobless claims hit their highest level in nearly two months last week, the move was largely attributed to a vicious and widespread winter storm that affected large parts of the nation. Beyond that, there’s not a lot of evidence for widespread layoffs, despite some high-profile announcements recently from major employers including UPS and Amazon . But with inflation stuck considerably above the Fed’s 2% bogey, any weakness in the labor market complicates matters. “It’s my forecast that unemployment is going to continue to grind upward,” said Christopher Hodge, chief U.S. economist at Natixis CIB. “This is still a labor-market-first Fed. We haven’t been at target inflation for 57 consecutive months yet, everybody, including myself, has more cuts penciled in.” Hodge and Zandi both expect the Fed to lower three times this year. Futures traders are still pricing in two, but with a nearly 40% probability of a third, according to the CME Group’s FedWatch . Market questions Another important factor has been a wobbly stock market this year, Friday’s massive rally notwithstanding. Equity market prices had helped keep a floor under consumer sentiment, which otherwise is only a few points above record lows, according to the University of Michigan’s closely watched survey. The survey’s update for February, released Friday, showed an incremental improvement, owing mostly to asset holders. “Sentiment surged for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings,” survey director Joanne Hsu said. Stock market profits — and losses — skew to the upper end of the income scale, with the top 1% of earners holding 36% of financial assets, according to the St. Louis Fed. With consumers driving more than two-thirds of all economic activity, and with most of the spending coming from higher-income consumers, keeping that sentiment stoked is crucial. “The stock market wealth effect plays out over a period of time, so it’s more indirect,” Zandi said. “That should also be on the top of the last, particularly in the context of the very low savings rate. The run in equity prices has incented and induced households, the well-to-do, to spend more money out of income. … If the stock market were to wobble, that would mean much less consumer spending.” There’s some anticipated relief ahead, however, that could change the equation further. Stimulus measures tied to the One Big Beautiful spending bill passed last year are expected to provide a boost to income tax rebates that will help individuals, along with deregulation and expensing provisions aimed at businesses. With all that in mind, Hodge, the Natixis economist, still sees the economy growing at a 2.2% pace next year, albeit with some help from Fed rate cuts. Kevin Warsh , the Fed chair-designate for when Jerome Powell steps down in May, is expected to push for lower rates and a smaller central bank footprint in the economy. “As long as the unemployment rate continues to go up, I think the Fed is going to continue to try to provide accommodation,” Hodge said. “Now, that’s what I think the Fed will do. I don’t think they should be cutting at all.”
This week provided more evidence that a softening labor market is the economy’s biggest threat