Breakeven for payrolls could slip

February 2, 2026

Payroll employment is expected to rise by 65,000 jobs in January, the largest gain since September 2025, but less than half the pace of monthly gains in 2024. Private sector payrolls are expected to account for 58,000 jobs, with the remainder showing up in public sector employment. Manufacturing is expected to continue to shed jobs.

Benchmark revisions for 2025 will be released along with the February employment report. Preliminary census data through September suggest that they will be to the downside. An acceleration in firm failures last year meant fewer small business hires, which are not captured in full until more source data is available. The monthly ADP data, which covers roughly 26 million actual paychecks, revealed the weakness in small business hiring in 2025 but we saw signs of a rebound in December.

Healthcare and social assistance jobs are expected to remain the primary driver of employment but at a slower pace. Costs for healthcare are rising due to everything from tariffs to the boost to demand from aging demographics. A lapse in subsidies for the Affordable Care Act has caused about 1.5 million people to drop coverage; that means more emergency room visits, which further stresses hospital budgets.

Another hurdle to employment is the surge in fees to $100,000 for new H-1B visas. Rural hospitals rely more on these doctors and nurses to fill vacant positions than their urban counterparts. They lack the funds to cover new fees for those workers.

Separately, January is a month when seasonal hires in retail are let go. However, seasonal hiring was less over the holiday season than in recent years, which means fewer people will be let go in January. Retailers typically shed more than 440,000 workers at the start of the year during the last four years; anything less than that could show up as a temporary gain after seasonal adjustment.

The last outlier to watch is leisure and hospitality, where quit rates soared late last Summer and in the Fall. That is due to the disproportionate role immigrants play in food preparation and accommodation and helped to buoy employment gains in December. Job postings for those positions and wages offered began to move higher late in the year, as pockets of labor shortages emerged.

The manufacturing sector and construction are expected to shed jobs. Vehicle producers have absorbed much of the blow to profit margins due to tariffs for fear of the toll that even higher prices could take on demand. Data center construction remains robust but employs very few people, while residential construction is expected to drop again at the start of the year

Average hourly earnings are expected to increase by 0.3% in January and jump 4.1% from a year ago. That would be the fastest wage growth since November 2024. A bump in the minimum wage across 19 states covering an estimated 8.3 million workers should add to those gains.

Wages began to accelerate late last year in both the goods and service sectors. The only places where wages are still decelerating are professional business services, private education and health services and construction.

Separately, the unemployment rate is expected to hold steady at 4.4% in January, the same as in December. The breakeven on payrolls for the unemployment rate to hold steady dropped to between 30,000 and 60,000 in the back half of 2025 due to curbs on immigration and peak baby boomer retirements.

Recent work by Brookings suggests that the breakeven pace of payrolls could slip as low as -20,000 to 20,000 as we move into 2026. It is possible that we could endure a payroll recession, even as the unemployment rate stabilizes in 2026. That is stunning.

The U6, which is a more overarching measure of unemployment is expected to hold at 8.4% in January, the same as in December. That includes those who have not looked for a job recently and those who were forced to accept part- over full-time work. The ranks of the latter hit a record in December 2025.

The number of those out sick and unable to work is another measure that needs to be watched. It has been a wicked flu season, with more people than usual out sick.