The Big Idea
Payroll gains point to firmer labor markets
This material is a Marketing Communication and does not constitute Independent Investment Research.
The employment statistics have been especially volatile in recent summers. After soft readings in June and July, payrolls jumped in August, seemingly making up for prior weakness. With the summer behind us, the numbers offer a clearer comparison between 2026 and 2025. They consistently show labor demand has firmed at the margin this year.
Stronger job growth
Payroll gains cooled sharply last year. Overall employment only rose by 10,000 a month, while private sector payrolls increased by 25,000, In late August, the Bureau of Labor Statistics said benchmark revisions for the 12 months ended in March 2026 would be modestly negative. Including that preliminary estimate, total payrolls will likely show gains of less than 5,000 a month in 2025, while private sector gains will likely be trimmed to about 15,000.
Through the first eight months of this year, total payrolls have risen by 80,000 a month, while private sector job growth has averaged 84,000. Benchmark revisions would likely lower those figures by about 2,000 and 5,000, respectively. That would leave both headline and private payroll growth running near 80,000 a month this year.
Two points stand out in the aggregate figures. First, labor demand has picked up significantly from 2025. A variety of other labor market proxies support that assessment. Most notably, initial jobless claims have fallen, signaling fewer layoffs. New filers averaged 226,000 a week last year and is running 211,000 a week year-to-date in 2026. That 15,000 difference may not seem like much, but it works out to around 60,000 to 75,000 a month (15,000 a week times four or five weeks in a month). Coincidentally, that difference between 2025 and 2026 is quite close to the magnitude of the acceleration in payroll gains.
Second, the data support the widely held view that the breakeven pace of job gains—the rate needed to keep up with the underlying growth in the labor force— has fallen to around 50,000 a month. The marked shift toward a tighter immigration policy has helped to limit the rise in the working-age population, reducing the job growth needed to keep the unemployment rate steady over time. It rarely works out quite this neatly, but a modestly lower-than-breakeven pace of payroll gains in 2025 was accompanied by a small rise in the unemployment rate, from 4.1% in December 2024 to a local peak of 4.5% in November. Then, the 80,000 a month clip so far this year, somewhat faster than the presumed breakeven rate, has been associated with a gently declining unemployment rate, back down to 4.1% in July and August.
Together, the major indicators paint a consistent picture. The labor market loosened modestly last year and has tightened somewhat in the first eight months of 2026. Since the FOMC believes that the full-employment level of the unemployment rate is 4.2%, the current situation is close to ideal. It is easy to understand why most Fed officials have declared the full employment box checked and are solely focused on inflation.
Sectoral swings
The acceleration in job growth in 2026 has been remarkably broad. Of the 14 major payroll sectors, seven have seen a meaningful acceleration in gains this year versus 2025, three have weakened, and four are little changed. The sectors that have firmed point to broadening economic strength (Exhibit 1).
Exhibit 1: Sectors showing stronger payroll job changes in 2026
Source: BLS.
Construction hiring has picked up, predominantly in the nonresidential sector. Much of this job growth undoubtedly reflects the frenzied building of data centers around the country. The goods sectors of the economy, manufacturing, wholesale trade, retail trade, and transportation, have all flipped from modest declines in 2025 to small gains this year. This likely reflects the improvement in the environment as uncertainty regarding tariff policy has faded. This brightening tracks with various business surveys that have firmed over the course of the year. Even in the services area, professional and business services employment has also gone from contraction in 2025 to solid gains so far this year. About half of the improvement came in the temporary help industry. Finally, the downtrend in government payrolls has abated, as the pace of contraction of federal employees has been reduced sharply.
The three sectors that have seen slowing in 2026 likely reflect structural changes rather than cyclical cooling (Exhibit 2). In the case of information and finance, the story may be related to AI. There have been widespread reports of tech companies reducing their headcounts for certain functions, like entry-level coding, due to the advance of AI capabilities. Similarly, banks and financial firms have been cutting back on headcount, likely reflecting the proliferation of technology. Finally, the robust pace of job gains in the health care sector has cooled somewhat so far this year. This could reflect firms finally catching up in level terms after enduring an acute labor shortage for several years coming out of the pandemic. Whatever the driver is, we can confidently say that it is not evidence of broad economic weakness, as employment in this sector tends to be one of the least closely correlated to the fortunes of the overall economy.
Exhibit 2: Sectors showing weaker payroll job changes in 2026
Source: BLS.
Of the four sectors that have seen little movement in the pace of payroll changes, three are relatively small (mining, utilities, and other services). The fourth might be a bit surprising: leisure and hospitality. After all of the monthly volatility in this sector, with gains of more than 40,000 in March, May, and August, and drops of more than 20,000 in February, June, and July, the net result is an average increase of 5,000 a month compared to +8,000 a month last year.
Conclusion
The major labor market indicators—payroll gains, the unemployment rate and initial jobless claims—all tell a consistent story: the labor market softened modestly last year and has firmed somewhat so far in 2026. The bottom line for the Fed is that the economy is roughly at full employment, right where policymakers want it.
The sectoral breakdown of payrolls shows that many of the most cyclical industries have flipped from job losses in 2025 to modest gains this year, signaling an improvement in the economy’s fortunes. While payroll growth overall is subpar by historical standards, it appears to be running faster than what is needed to keep pace with the growth in the working-age population, as evidenced by the fall in the unemployment rate back down to 4.1%. All signs point to a highly favorable labor market situation.
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