The Labor Market Isn’t Bouncing Back Yet

• Services and manufacturing surveys show hiring improved in January.

• Labor gains look set to start the year well below the normal pace.

• The slowdown will maintain pressure on the Fed to support growth.

Don’t expect much of a labor‑market rebound in January…

This week brings an important read on the trajectory of U.S. growth. On Friday, the BLS releases its January payroll report, and Wall Street’s looking for a gain of just 67,000 jobs. If that’s where the number lands, it’ll be a sharp miss versus the typical January increase of 222,000 since 2015—and the second straight year starting on a soft footing…

January is usually one of the best months to find a job. But recent Fed business surveys suggest hiring merely held steady last month, following December’s modest 50,000‑job gain. If the national data confirms that, it points to slow but stable growth. That backdrop strengthens the case for additional rate cuts later this year and supports a steady grind higher in the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

Each month, several regional Fed banks survey manufacturing and services firms in their districts to gauge business activity. I focus on the employment and inflation components from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Together, these regions make up about 32% of U.S. GDP. Their surveys offer an early read on national trends, especially since they come out before market‑moving reports like the BLS payrolls.

Today, I’m focusing on employment. Let’s break down the individual components before zooming out to the broader picture.

Starting with the manufacturing surveys…

The chart above shows the sector’s hiring trend over the last seven years. After the pandemic collapse, factory hiring surged, but momentum has steadily faded. Manufacturing employment held firm through most of last year, saw a brief breakout in July and August, then softened into year‑end—and that cooling appears to have continued.

The services sector fared worse…

Hiring stayed weak, with the gauge barely breaking out of negative territory following four straight declines. Philadelphia was the only district to show signs of consistent strength, while New York, the largest weighting, remained the biggest drag. And it wasn’t just hiring that was fragile. Delivery times, the average work week, and backlogs, remained weak.

To get a clearer national picture, I combined the manufacturing and services data into a single gauge—weighted 80% services and 20% manufacturing, in line with the U.S. employment mix. I also weighted each district according to its GDP contribution…

As you can see, after a brief mid-year bounce, the overall hiring picture remains soft. In January, my combined index turned positive after four straight declines, but only just.

Now, let’s look at the combined Fed employment gauge compared to nonfarm payroll data for historical perspective…

In the chart above, I used a three‑month rolling average to smooth out volatility and highlight the trend. The combined Fed survey data tends to lead national hiring. The three‑month average rose late last year, just ahead of a strong nonfarm payrolls report. But it rolled over at the start of this year and has been declining since.

Bottom line: manufacturing and services employment remains fragile. If the BLS confirms this trend when it releases the numbers, it will show that hiring remains well below historical norms.

And if that happens, Wall Street will likely grow more confident in its expectation of two more rate cuts by the end of 2026. That would align with recent comments from policymakers who want to give last year’s adjustments more time to work.

At the end of the day, even lower rates by the end of 2027 would push borrowing costs down, free up cash for households and businesses, and support economic growth. That would help fuel a continued long‑term rally in the S&P 500.

Five Stories Moving the Market:

Nvidia plans to make a "huge" investment into OpenAI, probably its largest ever, according to CEO Jensen Huang, denying he was unhappy with the ChatGPT maker; Nvidia announced plans in September to invest $100 billion in OpenAI – Reuters. (Why you should care – Huang’s comments were refuting an article by the Wall Street Journal saying he was rethinking his investment plans)

House Speaker Mike Johnson (R-LA) faces a difficult vote to reopen the government as House Democrats refuse to support funding measures without significant immigration reform; with a 218-213 majority, Johnson will need to keep almost all Republicans on board or risk the shutdown that started Saturday stretching deep into the week – WSJ. (Why you should care – passage will keep the bulk of the government funded through the rest of the year, while a permanent Department of Homeland Security measure needs to be worked out)

Federal Reserve Vice Chair for Supervision Michelle Bowman said she saw merit in waiting to lower rates further given elevated inflation and uncertainty over potential distortions in economic data stemming from last year’s record-long government shutdown; Bowman said the downside risks to the labor market have not diminished, but she prefers to move policy toward neutral at a more “measured pace” this year – Bloomberg. (Why you should care – Bowman still supports rate cuts but she sounds less worried about the current monetary policy stance)

Kevin Warsh has spent much of the last 15 years criticizing the Federal Reserve for getting too big, mismanaging inflation and compromising its independence; he faces three key tests: significantly shrink the Fed’s balance sheet without upsetting markets, push inflation down to 2% and keep it there, and do this without meddling by Trump that compromises the Fed’s independence – WSJ. (Why you should care – Warsh faces a difficult task in getting the 12-member Federal Open Market Committee to go along with his plans)

Oracle said it plans to raise $45 billion to $50 billion in 2026 to build additional capacity for its cloud infrastructure through a combination of debt and equity sales; the company plans to raise half of the funds via equity-linked and common equity issuances, while it will garner gain the balance from a single debt offering – Bloomberg. (Why you should care- the company said the proceeds will be used to meet demand from Oracle Cloud Infrastructure customers, including AMD, Meta, NVIDIA, OpenAI, TikTok, and xAI)

Economic Calendar:

Earnings: DIS, NXPI, PLTR, SPG, TER

China – Official Manufacturing, Non-Manufacturing, Composite PMI for January (Saturday)

China – Caixin China Manufacturing PMI for January

BoJ Summary of Opinions

Japan – au Jibun Bank Japan Manufacturing PMI for January

Germany - Retail Sales for December (2 a.m.)

Eurozone – HCOB Eurozone Manufacturing PMI (Final) for January (4 a.m.)

U.K. – S&P Global U.K. Manufacturing PMI for January (4:30 a.m.)

BOE’s Breeden (Deputy Governor) Speaks (6:45 a.m.)

U.S. – S&P Global U.S. Manufacturing PMI (Final) for January (9:45 a.m.)

U.S. – ISM Manufacturing PMI for January (10 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

U.S. – Fed’s Bostic (Atlanta, Non‑voter) Speaks (12:30 p.m.)

U.S. – NY Fed Loan Officer Survey (2 p.m.)