Mark Schniepp
January 2026
Recent Labor Market Evidence
The November report on job openings and layoffs paints a picture of a U.S. labor market that continues to soften. Job openings declined further, and layoffs are rising, reflecting a clear and reduced proclivity by firms to expand their workforces.
The private sector experienced weak growth in the final three months of 2025, averaging just 29,000 net new jobs. This is down sharply from the 100,000 average in the first quarter of 2025. Furthermore, we expect weak growth to persist in 2026.
But while there is much less hiring and more separations occurring in the broad U.S. and California labor markets, the unemployment rate, though weaving and bobbing, is not projecting a worrisome condition. The most recent reports show the rates moving lower for both the U.S. and for California.
And in California, there are net job losses to date for calendar 2025.
Deportations are subtracting from the labor force and limiting its growth. Housing remains a chronic constraint for
domestic migrants further limiting the California labor force. Employers are finding workarounds by turning to more international hiring and/or more automated processes.
There will be fewer job opportunities in 2026 nationwide, and even fewer in California.
Healthcare and state and local public sector job growth are forecast to remain positive, along with skilled jobs in the professional services and industrial sectors. However, there is likely to be further downsizing in financial activities, information, manufacturing assembly, and retail/wholesale trade. Companies still need people who can run, manage, and improve the systems that are now part of routine business operations.Automation and AI will make work better. They replace humans in repetitive work allowing workers to focus on problem solving. They also make operations safer, more efficient, and more predictable. They don’t slow down or get tired. And they only get better at what they do.
Be generally prepared for a jobless expansion, where goods and services growth will be relatively high but net employment growth will be stagnant.
This means there will be amplified competition for available jobs.
Tariff scare fading
There was some evidence that trade disruptions eased in December. The indexes for new export orders and imports expanded for the first time since the summer, when tariffs were at their height and much uncertainty about trade deal negotiations clouded the outlook. As new tariff actions have calmed down, and with new trade agreements in place, many firms have adjusted their supply chains to optimize sourcing and minimize costs. This is one reason the index for inventory purchases is trending higher.
Calming of the tariff hysteria will boost hiring in the logistics sector. With less uncertainty this year regarding the modus operandi of the new administration, anxiety about new hiring will ease.
Tariff revenues are soaring now, producing record-setting revenues, which could provide some small reduction in the annual budget deficit.
Affordability squeeze
Inflation has clearly eased but Americans are still impacted by the fallout of the 2022-2023 inflation surge. As consumers, many are deeply unhappy with their financial situation, and with good reason. They are grappling with a severe affordability squeeze. Prices for many goods, from groceries to car insurance (and home insurance and gasoline in California), are high and continue to climb. Meanwhile, wage inflation (pay increases) is slowing due to the stalling of job creation and short supply of job openings.
Deportations are freeing up housing in many parts of the country and rent inflation has moved decidedly lower. In many regions of California rent inflation has subsided to less than one percent but housing costs are still too high for many individuals and families. Rental property vacancy rates have increased. According to Kidder Mathews and Lee & Associates, the rate in Los Angeles County is 5.3 percent, 5.0 percent in San Diego County, 6.0 percent in the Inland Empire, but due to limited inventory, is still 3.6 percent in Orange County.
This month’s outlook for economic conditions in 2026
Improvement in 2026 over 2025 is currently expected. But new job opportunities will remain austere. No risk of recession, but job seekers may not see it that way.
Inflation will continue to gradually deflate.
Interest rates—-both short and longer term—will decline.
Tariff fears will melt away.
And affordability concerns should improve. But prices for general goods and services are not going to decline.
Corporate America should be profitable in 2026. The growth of earnings will be the result of productivity gains from AI, lower interest rates, and tax cuts which will push consumption higher. Analysts generally expect double-digit earnings growth for S&P 500 companies in 2026.
On January 1, 2026, Deutsche Bank predicted the S&P will reach 8,000 points by year-end, suggesting a gain of nearly 17 percent. Morgan Stanley, JPMorgan Chase, and Goldman Sachs are generally optimistic about the broader market indices for 2026, forecasting double-digit returns and significant earnings growth.
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
