US labor soft, but no acute stress
Labor market data show continued softness in the US and Canada, while Australia’s inflation eases. Next week, watch for steady US inflation and a potential rebound in EU industry.
Weekly highlights
Big downward revisions also
Really strong; will it continue?
Better, but vulnerable
Weak, worse than expected
Weaker than expected
Expanding at softer pace
Good data, below expectations
Good data, below expectations
Very strong
US: Ongoing labor market softness
The dense data fog that had descended upon the US economy due to the prolonged government shutdown is finally starting to lift. New labor market updates this week confirm a backdrop of softness without acute weakness.
Nonfarm payroll employment rose a weaker-than-expected 50k in December, but the bigger story perhaps was the big downward revision to the October estimate, which now indicates a net loss of 173k jobs that month, compared with the 105k decline reported previously. While this is water under the bridge to some extent, it does better match our own estimates of the ultimate impact of the DOGE deferred layoffs announced in the spring but effective in October. The latest data point to job losses averaging 22k per month in Q4 2025.
Performance is poised to improve from here, if for no other reason that there is no DOGE 2.0 on the horizon, but the trend of soft labor demand is here to stay, as evidenced by another drop in job openings. Without a pickup in labor demand, there can be no pickup in hiring. Constraints to labor supply (mostly via immigration) will likely be the factor keeping the unemployment rate in check, although we believe risks are clearly to the upside. The unemployment rate ticked down a tenth to 4.4% in December (November was also revised down by a tenth to 4.5%) but hours worked remain weak and imply more vulnerability under the surface. Wage data was somewhat mixed, with overall average hourly earnings (AHE) inflation up two tenths to 3.8% YoY but AHE for production and non-supervisory employees down to 3.6% YoY, an almost four-year low.
The takeaway here confirms Chair Powell’s assertion over the last few months that the labor market is not a source of meaningful inflationary pressures. If there was any lingering doubt about that, the Q3 update on productivity and labor costs should dispel it. In truth, we are somewhat perplexed by the strength of consumer spending in the Q3 GDP data, and any future downward revisions may alter things at the margin. But, based on current data, labor productivity surged at a 4.9% annualized rate in Q4, keeping unit labor costs growth into negative territory for the second consecutive quarter (‑1.9% QoQ SAAR). Still, these recent declines must be interpreted in the context of the Q1 surge. On a YoY basis, unit labor costs have normalized in a non-inflationary range but are by no means collapsing (Figure 1).
Canada: Labor market slack persists
Following several months of positive surprises, the labor market experienced a modest reversal in December, as job creation stalled and the unemployment rate edged higher due to increased labor force participation. Given the inherent volatility in these data, such an outcome is not unexpected and aligns with our view that the labor market continues to face challenges.
In December, the unemployment rate rose from 6.5% to 6.8%, accompanied by an increase in labor force participation from 65.1% to 65.4%. Employment growth within public sectors such as educational services and health care was offset by reductions in other service industries, notably finance and insurance, as well as professional services including accounting, legal, and engineering. Meanwhile, trade-exposed sectors such as manufacturing and transport and warehousing have seen conditions stabilize toward the end of the year.
This development is unlikely to prompt a policy response from the Bank of Canada. Weak labor market, ongoing trade uncertainty, and potential inflation risks suggest that the policy rate will likely remain unchanged in the near term.
Australia: Good (data) start
Headline CPI inflation came in at 3.4% YoY for November, two tenths below both our and consensus expectations—a positive start to the new year. Our updated forecasts had already penciled in a lower-than-consensus inflation rate of 3.2% YoY for 2026, as we expect the factors that recently pushed CPI higher to gradually fade. The latest print aligns with the Reserve Bank of Australia’s (RBA) projection of a 0.8% quarterly rise, reinforcing the case for a hold in February.
The key swing factor was electricity prices, which surged 7.0% MoM as rebate timing continued to distort pricing. We anticipate ongoing volatility in this segment, meaning occasional upside surprises are likely—but we caution against overreacting to these moves. Rental prices rose 0.4%, and new dwelling costs tracked expectations. Meanwhile, discretionary categories such as clothing (‑3.0%) and accommodation (‑2.7%) declined, likely due to seasonal effects. Goods inflation eased by five tenths to 3.3% YoY, while services remained firm at 3.7%. Importantly, the trimmed-mean measure landed at 3.2% YoY, edging closer to the RBA’s target band.
Looking ahead, we continue to expect the RBA to hold rates for an extended period. However, if policymakers remain patient through H1 and monitor labor market trends closely, they could gain critical space to ease later in the year.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.