Despite recent hints of improvement in services hiring, the U.S. job market remains soft – a key concern that led the Federal Reserve to cut interest rates in late 2025. Job growth is narrowly concentrated in sectors like health care and hospitality, while manufacturing and other cyclical industries continue to struggle. Broader structural forces – including tax policies favoring capital investment, the rise of AI, slower labor force growth, and tariffs that have failed to revive factory jobs – are reshaping the employment landscape. These trends put the Fed in a difficult position: rate cuts may not reverse the underlying shift away from labor, and could even encourage more automation.
Major Points Highlighted:
Weak employment – especially in the second half of 2025 – pushed the Fed to resume interest rate cuts in September 2025.
Services sector employment recently showed signs of improvement (ISM Services PMI Employment index rose to 52% in December 2025), but growth is concentrated in only a few industries like health care and leisure/hospitality.
Cyclical sectors tied to the business cycle continue to see negative job growth, while manufacturing jobs keep declining despite tariffs intended to boost them.
Policy-driven shift from labor to capital – tax incentives under the One Big Beautiful Bill Act (OBBBA) encourage firms to invest in automation and equipment rather than hiring workers.
Demographic and immigration trends are reducing labor supply, while AI and automation accelerate the substitution of capital for labor.
The Fed faces limits – interest rate cuts may not solve structural labor market issues and could even speed up the move away from human labor in some industries.
