U.S. Analysis

The Bottom Line:

The January employment report showed continued improvement in the US labor market. A strong payroll gain of 130k and a drop in the unemployment rate to 4.3% both signal that the labor market remains on solid footings despite last week’s softer labor data and recent layoff announcements. While we do expect the unemployment rate to drift slightly higher in 2026, the supply side remains structurally tight, limiting how high it can go. The underlying details were encouraging this month, as the combination of average hourly earnings jumping 0.4% m/m (3.7% y/y), and the uptick in hours worked means take home pay was very strong this month (+4.3% y/y). Importantly, we think the aggregate hours is a better leading indicator of labor market weakness over layoff announcements because it sends a true signal of labor demand.

Still, we caution reading too much into one month of data and this month was particularly noisy. The preliminary benchmark revisions were sizable and while they are backwards looking (April 2024-March 2025), the updates to the birth-death model impacted more recent estimates and we are still waiting on the population revisions to those household survey next month. Importantly, what the benchmark revisions tell us is that the economy did what it did last year with fewer workers – GDP growth, consumption, jobless claims, and the unemployment rate are unimpacted by the employment revisions. The exception is output per worker – which should be a positive story. Don’t be fooled by the headlines that suggest the US “lost” jobs last year – those “jobs” never existed, and it should be that much more impressive the US economy performed as well as it did.

Looking ahead, this print solidifies our view that the Fed will go on a long pause in 2026. With the labor market on solid footings, sticky inflation, and short term tail winds coming from OBBBA in H1, we see the Fed as maintaining a data dependent reaction function.

We continued to witness our 3 core labor market themes playing out in this morning’s report:

1. Downtick in unemployment rate flags declining breakeven employment

We expected the unemployment rate to tick lower this month to 4.3% and this came to fruition – flagging what we have long highlighted: US breakeven employment is significantly lower than it was a year ago – and this morning’s CES benchmark revisions imply that this is the case. The initial take from these revisions is that the US created  fewer jobs in 2025, meaning monthly job creation was -72k weaker than published in the payroll data. That may shake some nerves, but it comes with a silver lining: the US needs to add fewer jobs for the unemployment rate to hold steady. We think breakeven employment in 2026 is below our prior estimate of 40K in 2025, which is a low bar for this job market to meet.

Importantly, what the benchmark revisions tell us is that the economy did what it did last year with fewer workers – GDP growth, consumption, jobless claims, and the unemployment rate are unimpacted by the employment revisions. The exception is output per worker – which should be a positive story and suggests higher productivity levels. Similar to last year, revisions were largest in the information sector, but we also saw sizeable revisions in trade-exposed sectors including wholesale trades, trade, transportation, and utilities, and transportation and warehousing.

2. Cyclical growth is mostly dormant as structural hiring accounts for two-thirds of job creation

While 130K looks like a blowout print on the surface, outside of construction and health care and social assistance, hiring was subdued. The story of the US  labor market continues to be one where structural growth bolsters overall job creation. On a cyclical basis, job creation is lackluster – the exception being nonresidential construction, which is being propelled by AI capex investment.  

Concerningly, private services ex-health & education saw flat hiring this month. We saw job losses in finance, transportation and warehousing, and information. One month does not make a trend but we will be closely watching these sectors for AI related layoffs in the coming months. Additionally, the government sector shed 42K jobs – this was concentrated in the Federal workforce.

3. Limited job cuts from stretched margins; but tariff uncertainty weighs on hiring in trade-exposed sectors 

Trade-exposed sectors continued to stagnate. While the goods sector created 36K jobs in January, this was largely driven by construction employment. The manufacturing sector did add 5K jobs this month, but this does little to make up for the 126K jobs shed since November 2024.

Transportation and warehousing shed jobs for the 3rd consecutive month, as did wholesale trade, as lower trade volumes weigh on jobs in these sectors. 

Beneath the Surface

• The labor force participation rate rose to 62.5% from 62.4% previously. Similar to last month, job losers account for about half of those unemployed and another 40% of unemployed job seekers are new labor market entrants or re-entrants. 

• The share of unemployed workers who are long-term unemployed is still sitting at around 25%, which is up from one year ago (21%). This suggests longer job search times and is unsurprising amidst the sluggish hiring backdrop as firms grapple with uncertainty paralysis. But the duration of unemployment ticked down this month signaling some unemployed workers were able to find jobs.

• Average hourly earnings rose +0.4% in January. This was unsurprising considering pay adjustments, seasonal layoffs, and minimum wage hikes in January.

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Mike Reid is a Director, Head of US Economic Research at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a Senior US Economist at RBC and a member of the US Economics team at RBC Capital Markets. Carrie is responsible for projecting key US indicators including GDP, employment, consumer spending and inflation for the US. She also contributes to commentary surrounding the US economic backdrop which she delivers to clients through publications, presentations, and the media.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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