December Employment Recap: Should I stay or should I go?

The Employment Report for December, anticipated as the first “clean” (undistorted by the government shutdown) print in some time, provided anything but clarity about the labor market. On one hand, job gains fell short of expectations and the three-month moving average limped across the finish to end 2025 with a contraction of 22k jobs per month. On the bright side, the unemployment rate improved significantly. Payrolls, according to fed Chair Jerome Powell, should be viewed skeptically due to “systematic overcounting” and changing demographics, so policymakers are more focused on labor market ratios (such as the unemployment rate). Though Fed leadership is firmly focused on arresting any additional labor market weakness, this print should provide ammunition to the hawks advocating for more of a focus on inflation and a pause at the January meeting, which we now think will occur. Going forward, there are troubling signs for the labor market. Job openings data earlier this week indicated that recruiting intensity continues to decline and a normalization of Beveridge Curve (the historical relationship between job openings and the unemployment rate) would imply higher unemployment in the coming months. Policymakers will need to weigh the potential downsides for the labor market in the future – not yet apparent – versus the risk of stickier inflation. We think that inflation data should be somewhat tame in the coming months and the unemployment rate should rise, so despite a pause in January, we still think the Fed will get to a terminal rate of 3% by the end of H1, though a pause/cut pattern is possible in the coming meetings as well. Changes in payrolls softer overall Source : Haver, Natixis