US Job losses temper labour market stabilisation hopes

The February employment report delivered significantly weaker-than-expected job losses, challenging the notion that the labour market was stabilizing after last month’s robust gains. Total non-farm payrolls fell by 92,000, the second-worst monthly print in roughly three years and a stark reversal from January’s 126,000 revised gains.

While one-off factors such as healthcare-related strikes, bad weather, and the BLS’s changes in methodology may have contributed to the weakness, structural forces, including reduced immigration, rapid AI advancement, government budget cuts, and demographic headwinds, continue to suppress job creation.

Still, the unemployment rate’s small uptick (+0.1ppt from last month) underscores a labour market that remains in a low-hiring, low-firing equilibrium, despite the disappointing payrolls print. Therefore, market participants should be cautious about interpreting today’s report as a clear recession signal. Rather, it adds another layer of uncertainty for policymakers to navigate.

Report details

• Total non‑farm payrolls declined by 92,000, significantly below the expected +55,000 gain and a sharp reversal from January’s revised +126,000. The two‑month net revision of –69,000 (vs. prior –17,000) and weakness in private payrolls, declining by 86,000 versus expectations of +60,000, further reinforced the softness after last month’s report had indicated some firmer footing.
• Industry dynamics revealed broad-based softness. The healthcare & social assistance industry—the consistent bright spot amid 2025’s labor market weakness—posted a modest decline, largely due to strike activity reported in the healthcare sector. After averaging roughly 80,000 gains per month in healthcare and social assistance from 2023 up until last month, February’s 34,000 decline marked the first negative print in four years.
• Cyclical and immigration-heavy industries, including leisure and hospitality, manufacturing, and construction, collectively contributed to the headline weakness. While manufacturing and construction showed tentative signs of revived activity last month, this month’s results dampened those hopes. It is worth noting that these industries may have been affected by weather, though the weakness is also consistent with recent uncertainty around interest rates, tariff policy, and labor supply constraints.
• Declines in the tech industry continue to underscore headwinds in occupations most exposed to rapid AI advances, though Challenger’s February layoff data do not suggest that AI is the main culprit for job losses. Additionally, moderate job gains in financials—driven by financial services and real estate, two segments also viewed as vulnerable to AI substitution—help downplay AI as a primary driver of February job softness.
• The unemployment rate inched up to 4.4% from 4.3% last month. The 0.1ppt drop in the labor participation rate to 62%, the lowest since 2021, signals that a declining labor force is helping keep the labor market in balance, particularly as stronger-than-expected wage gains underscore some resilience.

Policy outlook

February’s report adds another layer of complexity for the economic and policy outlook. Unlike January, when strong payrolls and a declining unemployment rate reduced the need for additional rate cuts and shifted focus back to inflation, February’s softness raises downside risk to the Fed’s employment mandate and re-opens the door to cuts. Simultaneously, escalating conflict in the Middle East has pushed oil up roughly 55% year-to-date, leaving prices just shy of $90 per barrel, the highest level since fall 2023.

The resulting stagflationary tilt is an uncomfortable development for markets already navigating multiple macro crosscurrents. Still, a February employment report potentially distorted by strikes, weather, and BLS methodology should be taken with a grain of salt. The unemployment rate remains near historical lows, and wage growth is consistent with a still-tight labor market—both of which underscore stability beneath the headline noise, especially given ongoing labor-supply constraints.

Against the backdrop of various macro forces, the Fed is unlikely to react to February’s decline alone, especially as upside inflation risks loom and the situation in the Middle East remains fluid. We continue to expect two rate cuts in the second half of 2026, not in response to a labour‑market downturn (which is still premature), but to drive policy back toward a neutral stance. 

Principal Asset Management