US jobs data shows a strong rebound after a soft 2025 labour market

The January employment report delivered a stronger-than-expected gain in payrolls, challenging concerns that the economy is losing momentum. Non-farm payrolls rose 130,000 in January, beating expectations and marking a sharp acceleration from December. Meanwhile, the unemployment rate ticked down to 4.3%, revealing labour market stabilisation despite significant downward revisions to 2025 payrolls.

Structural forces, including aging demographics, constrained immigration, and AI-driven productivity gains, continue to suppress job creation. Even so, today’s jobs report reflects a labour market that remains resilient, with a broadening of industry job gains reinforcing the economy’s strength at the start of the year. 

Report details

• Total non-farm payrolls increased by 130,000 in January, surpassing expectations of 65,000. Revisions to November and December lowered total payroll growth by 17,000 jobs, a notable improvement from the previous two-month revision that subtracted 76,000 jobs. Private payrolls were robust, rising 172,000 versus expectations of 68,000. Together, January’s job gains suggest the labor market is beginning 2026 on firmer footing.
• Payroll gains were led once again by healthcare & social assistance, which added 137,000 jobs, the largest monthly increase since mid-2020. These strong gains highlight the sector’s ongoing structural momentum and continued meaningful contribution to overall job creation. Gains in construction, manufacturing, and professional and business services—three sectors that lagged in 2025—underscore the improving breadth of hiring and point to some stabilization in cyclical industries.

• Payroll weakness was concentrated in government (-42,000), and financial activities (-22,000). Federal government jobs accounted for the bulk of government losses, largely driven by deferred resignations rather than cyclical deterioration. Losses in financial activities were centered in insurance carriers and related activities, as well as real estate and rental & leasing services.
• The unemployment rate declined to 4.3%, down from 4.4% last month. Meanwhile, the labor force participation rate increased 0.1% from the prior month, signaling underlying resilience in labor demand despite ongoing challenges for job seekers re-entering the workforce. Combined with firm average hourly earnings, which grew by 3.7% over the past year, the data points to labor market stabilization rather than deterioration.
• On a softer note, benchmark revisions, which are released every January, lowered 2025’s total job gains, indicating the labor market was weaker than initially reported. Although much of this had already been anticipated based on provisional estimates released a few months ago, today’s revisions were slightly more negative than expected. However, this softness should be viewed against structural forces—increasing retirements and tighter immigration policies—that lowered the pace of job growth needed to keep the unemployment rate steady (i.e., breakeven rate). In this context, payrolls at levels that would appear recessionary in prior years are less concerning amid a shrinking labour supply.

Policy outlook

A stronger-than-expected January payroll gain, a decline in the unemployment rate, and wage growth holding near 4% all highlight the labor market’s underlying resilience, further reducing the need for immediate monetary support. In fact, market expectations for the first 2026 rate cut have now shifted from June to July.

In the absence of a clear and sustained deceleration in inflation ahead, incoming Fed Chair Kevin Warsh will likely face challenges in persuading the FOMC to adopt a more dovish stance. The labor market, as it stands, will not make that case for him. We do, however, still expect the Fed to cut rates in the second half of the year to move policy back toward a neutral stance, neither accommodative nor restrictive.

Principal Asset Management