The jobs picture still looks muddy, even with surprisingly strong January growth

• Nearly all January job gains came from health care-related sectors, raising concerns about employment opportunities for workers in other fields
• Average hourly earnings growth slowed to 3.71% annually (lowest since July 2024), threatening consumer spending which drives over two-thirds of U.S. economic activity
• The weak labor market creates policy tensions at the Federal Reserve, with some officials opposing rate cuts due to inflation concerns while others advocate for reductions given employment weakness

Market Summary: U.S. Labor Market Shows Mixed Signals Despite January Gains

Key Figures and Data

January added more jobs than any month in 2025, with unemployment declining to 4.3% (lowest since August). However, average hourly earnings rose just 0.4% monthly, with annual growth of 3.71%—the lowest since July 2024. The 2025 job market averaged only 15,000 monthly gains, with the final six months producing a net loss of 1,000 jobs.

Market Concerns

Despite solid Q4 2025 GDP growth of 3.7% (following 4.4% and 3.8% in prior quarters), economists warn of sustainability issues. Gregory Daco, EY-Parthenon's chief economist, projects subdued job growth below 50,000 monthly for the remainder of 2026. He warns of an "income-less expansion" as both job gains and wage growth remain under pressure.

Notably, every month in 2025 saw negative revisions from initial estimates, raising questions about January's data reliability. Nearly all January jobs came from healthcare-related sectors, limiting opportunities for displaced workers in other industries.

Federal Reserve Implications

The mixed labor data creates policy divisions at the Federal Reserve. Dallas Fed President Logan and Cleveland's Hammack oppose further rate cuts, citing stable inflation and labor markets. However, Governor Christopher Waller advocates for cuts, noting 2025's "Zero. Zip. Nada" job growth.

Markets have adjusted expectations accordingly: CME Group tracking shows only 6% probability of a March rate cut, though two reductions are still anticipated before year-end.

Bottom Line

With retail sales flat in December and consumer spending representing over two-thirds of economic activity, the weakening labor market and wage growth pose significant risks despite headline GDP strength.