Understanding the Mixed Bag of the Latest Employment Report
The latest U.S. employment report has left many wondering about the state of the economy. With only 50,000 jobs created in December, the total number of new jobs for 2025 was 584,000, averaging 49,000 per month. This is a significant slowdown from the 168,000 per month in the previous year and the lowest average monthly pace in over two decades, excluding recessions. To put this into perspective, the three-month average for nonfarm payrolls was a negative 22,000 jobs per month, with over 80% of new jobs created in the first half of 2025.
A Cautious Economy
Despite the overall economy performing well, employers are being cautious due to policy uncertainty, including unpredictable tariffs and geopolitical tensions. This has led to a “low-hire, low-fire” economy, where companies are holding onto existing workers but not adding to payrolls. The Federal Reserve Chair, Jerome Powell, has described this phenomenon, which is reflected in the slow hiring activity in recent months.
Uneven Job Creation
Looking beneath the surface, the picture becomes even more complex. Most new jobs were created in healthcare and social services, leisure and hospitality, and education, which are areas supported by expanding state and local government and higher-income consumers. However, other segments of the economy, such as manufacturing and transportation, experienced declines in employment. The increase in effective tariff rates from 2.5% to 14.5% since January has hit manufacturers particularly hard, as over half of all imports into the U.S. are intermediate goods used in American-made finished products.
What is a “Good” Jobs Number?
The question remains: what constitutes a “good” jobs number? Is it one million, two million, or 584,000? The answer depends on various factors, including the breakeven employment growth rate, which is the number of new jobs needed to maintain a constant rate of unemployment. For example, to maintain the current unemployment rate of 4.4%, a certain number of jobs must be created each month.
Assessing Job Growth
In recent years, around 250,000 to 300,000 jobs per month were needed to maintain a constant unemployment rate. However, the actual growth of 2 million jobs or 167,000 per month in 2024 was not enough to keep unemployment from rising. For the full year 2025, job creation averaged just 49,000 per month, compared to an estimated mean breakeven job growth of around 70,000. This disparity highlights the challenges in achieving sustained economic growth.
Demographic Shifts and Labor Force Growth
Two broad trends are combining to depress the rate of growth in the labor force: the aging of the population and the sharp decline in net immigration due to more aggressive deportation policies. The demographic shift has been underway for two decades, with the average age of the population increasing and the share of prime-age workers declining. The labor force participation rate has also fallen, from 67% in 2000 to 62.4% today, the lowest level since 1977.
Immigration and Labor Supply
The required replacement rate of native-born citizens is around 2.1 births per woman, but the actual birth rate is around 1.6 per woman. In the absence of immigration, the overall labor force will soon begin to contract. Net immigration declined from over 2 million in 2024 to around 400,000 last year and is projected to fall further in 2026. This decline in labor supply can be offset if each worker is able to do more, thanks to improvements in productivity.
Productivity and Economic Growth
Fortunately, the U.S. has experienced a surge in productivity over the past couple of years, which has compensated for the weakening labor supply. This resurgence in productivity, possibly due in part to the incremental penetration of artificial intelligence, has helped maintain economic growth. However, the unusual economic climate, combining relatively strong GDP with slower hiring, puts the Federal Reserve in a challenging position, given their conflicting legal mandates of containing inflation while promoting full employment.
Navigating the Economic Landscape
The Federal Reserve is reticent to cut interest rates too quickly, still smarting from its early failure to recognize the persistence of inflation during the post-COVID recovery. A more modest breakeven employment growth this year could provide the breathing room the Fed needs. Markets are currently pricing in two quarter-point cuts in 2026, which seems about right in a low-hire, low-fire economy. As the economy continues to evolve, it is essential to stay informed and adapt to the changing landscape to make informed decisions about your finances and investments.
