January non-farm payrolls were released today, five days later than anticipated due to a short partial shutdown of the U.S. federal government. While non-farm payrolls were expected to increase by +65k, whispers were for a potentially much lower print, particularly given the weak alternative labor data points released last week. Instead, January payrolls were up a solid +130k, with November and December reflecting only modest downward revisions of -15k and -2k, respectively. However, aggregate non-farm employment for 2025 was revised down meaningfully – from +584k to +181k – implying a monthly average payroll gain of only +15k for the year, making it the third weakest year for employment since 2003.
Breaking down the data, payrolls prints were once again led by health care (+82k) and social assistance (+42k). More interesting were the gains in construction (+33k) and manufacturing (+5k), particularly given the widespread weather disruptions in the month. The gains in these sectors appear to corroborate the move higher in ISM Manufacturing and could reflect the underlying economic momentum that we believe will strengthen from current levels. Offsetting these areas was a decline in financial activities hiring (-22k) and continued payroll losses within the federal government (-34k).
A decline in the unemployment rate to 4.3% from 4.4%, even with a pickup in the participation rate from 62.4% to 62.5%, was particularly notable; employed persons rose by +528k while unemployed persons fell by -141k. Of note, the unemployment rate improved across almost all demographic categories in the month as well, an indication that broader improvement may be at hand. Average hourly earnings rose by +0.4% month-over-month and +3.7% year-over-year while average hours worked were up as well to 34.3 from 34.2.
Expectations for the next Fed cut are reflecting the relative improvement indicated by today’s report, with higher probability afforded to a July interest rate cut. We would caution to jump to such a conclusion, however, ahead of Friday’s January CPI report. While admittedly this print was better-than-anticipated, the labor market remains in tension and the Fed has acknowledged that there is room to move rates lower absent an unexpected spike in inflation.
Our takeaway is that today’s report reflects several knowns – the U.S. labor market was softening throughout 2025, payrolls were overstated, and payrolls that were added were heavily concentrated in non-discretionary services. There is also evidence of (at the very least) delayed hiring in anticipation of productivity enhancing AI implementation. With our expectation for strong U.S. growth (+2.5%, with a risk to the upside), we believe the labor market will continue to improve throughout 2026 as layoffs remain muted and hiring ticks up on the back of rebounding activity. This should translate into stronger consumption, buoyed by increased tax refunds, as well as productive capital expenditure outside of AI suppliers. As such, we remain constructive on risk assets, encouraging further diversification in both sector and geography to ensure exposure to cyclical areas of the global economy. We encourage you to reach out to Neuberger to discuss the opportunities we see, and how you can best position your portfolios to take advantage of them in 2026.
