Why Q4 Layoffs are Ringing Alarm Bells
As 2026 gets under way, the US labour market appears healthier in the headlines than in the underlying data. Payroll growth remains positive on paper, yet layoffs are rising at a pace more consistent with recession than resilience, while real wages have stalled. The result is an economy that looks stable in aggregate but increasingly fragile beneath the surface.
The year-end figures from Challenger, Gray & Christmas sharpen that contrast. Employers announced just over 1.2m job cuts in 2025, up 58 per cent from the previous year and the highest annual total since the pandemic. More revealing was the timing. Almost 260,000 layoffs were announced in the fourth quarter alone, the largest Q4 figure since 2008 and more than 70 per cent higher than a year earlier. Such acceleration is rarely seen outside periods of outright economic contraction.
December brought a modest easing in announced cuts, but the broader signal did not improve. Hiring plans for 2025 were the weakest since 2010, suggesting firms have moved beyond trimming excess labour and towards a general pause in expansion. Historically, the combination of elevated layoffs and weak hiring has aligned more closely with downturns than soft landings.
The sectoral breakdown reinforces that message. Job losses have been concentrated in white-collar roles, particularly across professional and business services. By contrast, virtually all net job creation came from private education and health care. When employment growth is confined to defensive, non-cyclical sectors, it usually indicates that the rest of the economy is already retrenching.
Doubts about the labour market’s true strength were amplified late last year by comments from Fed Chair, Jerome Powell, who acknowledged that official employment data may be overstating job creation by around 60,000 positions per month. Powell pointed to methodological issues in the Bureau of Labor Statistics’ models, noting that reported monthly payroll gains of roughly 40,000 since the spring could therefore be consistent with flat or declining employment. In that context, the apparent resilience of the jobs market looks increasingly statistical rather than economic.
For those still in work, the payoff has been limited. Inflation absorbed nominal pay gains through the second half of 2025. In December, average hourly earnings rose by 0.3 per cent, exactly matching consumer prices and leaving real wages unchanged. Firms have increasingly reduced labour costs by cutting hours rather than headcount, pushing real average weekly earnings lower.
Looking into 2026, relief is not assured. Energy prices have eased, but service-sector inflation remains sticky, with health care costs, in particular, expected to rise further. That mix threatens renewed pressure on real incomes even if nominal wages continue to edge higher.
For monetary policy, the implication is less dramatic but more awkward. A labour market marked by rising layoffs, subdued hiring and falling hours is unlikely to generate sustained wage pressure. If official payroll growth is overstated, underlying conditions may already be weaker than markets assume. Yet financial conditions have not fully reflected that risk. The US 10-year Treasury yield, at around 4.18 per cent, still embeds an assumption of resilience rather than retrenchment. If labour market momentum continues to fade, the adjustment is more likely to come through lower policy rates, and lower yields, than through a reacceleration in growth.
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