The U.S. labor market is showing clear signs of cooling, with official Federal Reserve and government data pointing to slower hiring, rising unemployment, and easing wage pressures. The shift marks a departure from the tight labor conditions that dominated the post-pandemic recovery and is now shaping expectations for U.S. monetary policy in 2026.
According to the Federal Reserve Bank of St. Louis’ FRED database, nonfarm payroll growth has slowed markedly in recent months, with job gains increasingly concentrated in healthcare, education, and government. Employment growth in technology, manufacturing, and business services has weakened, reflecting reduced corporate investment and cost-cutting pressures.
The unemployment rate has also moved higher, reaching levels last seen several years ago. The Fed closely tracks this indicator as a measure of labor market slack and overall economic momentum.
Fed indicators point to easing labor demand
Other Federal Reserve indicators reinforce the picture of a cooling job market. Data from the Job Openings and Labor Turnover Survey show a steady decline in available job openings, alongside lower quit rates, suggesting workers are becoming less confident about changing jobs.
At the same time, wage growth has moderated. Average hourly earnings in the private sector are rising more slowly, easing concerns about persistent wage-driven inflation but raising questions about future consumer spending.
Policy implications and global impact
Federal Reserve officials have repeatedly stressed that labor market conditions are central to interest rate decisions. Slowing job creation and rising unemployment increase the likelihood that policymakers may begin easing monetary policy if inflation continues to move toward target levels.
For Europe, the cooling U.S. labor market has wider implications. A softer U.S. economy could dampen global demand, affect financial conditions, and influence capital flows, all of which matter for euro area growth and European Central Bank policy planning.
The latest data suggest the U.S. labor market is no longer a source of inflationary pressure but instead a growing area of economic risk. How quickly conditions deteriorate, or stabilise, will be closely watched by central banks, investors, and policymakers on both sides of the Atlantic.