Michael Strain of the American Enterprise Institute ponders surprising US employment numbers.
Markets, economists and Federal Reserve officials seem to believe that the US labour market spent most of last year weakening, that inflation is trending back to the Fed’s inflation target and that the central bank will continue cutting interest rates in 2026. On each of these three points, the conventional view is probably wrong.
The holes in the consensus narrative were clear before last week’s jobs report, which surprised many analysts on the upside. In January, the economy added 130,000 net new jobs and the unemployment rate declined by 10 basis points to 4.28 per cent.
But December’s 4.38 per cent unemployment rate was already very low. And the jobless rate — which was 4.3 per cent or higher for six months last year — had not been displaying a worrying upward trend. In addition, the rate at which employers are laying off workers has been flat since 2023. And according to my calculations, aggregate labour supply and demand are roughly in balance and have been relatively stable over the past year.
Monthly headline payroll gains — which trended down throughout 2025 — ostensibly tell a different story. But this reduction is mostly due to large declines in net migration.
The conventional view of labour market weakening has struggled to contend with robust economic growth. Real GDP grew at annual rates of 3.8 per cent and 4.4 per cent in the second and third quarters of last year, respectively, and at the time of this writing is expected by the Atlanta Fed to grow at 3.7 per cent in the fourth quarter. Growth in real consumer spending and gross fixed investment was strong and stable in the middle quarters of last year.
Disinflationary pressure might seem inconsistent with solid GDP growth and low and stable unemployment. And, contra the conventional view of analysts and of the Fed, inflation does not seem to be decelerating.
