While the latest U.S. jobs report showed modest growth, analysts at Scotiabank caution that the labor market is weakening in ways the Federal Reserve can no longer overlook, potentially setting the stage for an interest rate cut in January.
Headline nonfarm payrolls increased by 50,000 in December, roughly in line with consensus expectations and Scotiabank’s own forecast. Yet, revisions to prior months’ data removed 76,000 jobs, while the sector breakdown paints a more concerning picture, according to Derek Holt, vice president and head of Capital Markets Economics at Scotiabank.
“Take health sector hiring out of the picture and there isn’t much else,” Holt said. He noted that nonfarm payrolls excluding health care have declined in four of the past eight months and remained roughly flat in three others, with only September showing a minor gain. This narrow reliance on the health care sector for job growth is particularly troubling for policymakers, as health care employment is generally less sensitive to interest rate changes.
Since April, nonfarm employment outside the health sector has fallen by approximately 354,000. Holt added that additional headwinds—including “massive non‑Fed policy uncertainty” and the economic impact of artificial intelligence—have contributed to the slowdown. The imminent expiration of Affordable Care Act subsidies at the end of 2025 could also weigh on health sector hiring in the coming months.
Underlying data adjustments further suggest the labor market is weaker than headline numbers indicate. The annual benchmark revisions expected with January’s report are likely to reduce March 2025 payrolls by as much as 911,000. Fed Chair Jerome Powell has already highlighted a consistent overestimation of payroll gains since April, averaging about 60,000 per month. Once these adjustments are incorporated, the trend for both nonfarm and private employment may be considerably weaker than currently reported.
Seasonal factors also contributed to December’s modest gains. While not as extreme as some recent record highs, the Bureau of Labor Statistics’ seasonal adjustments still leaned toward higher payroll growth, Holt noted. He argued that the lack of transparency in these adjustments leaves questions about whether the methodology has been too aggressive, a concern he links to administrative changes dating back to 2017.
For the Federal Reserve, the concern is that the labor market may be signaling deeper issues than the headline numbers suggest. Holt pointed to consumer metrics and historical patterns indicating the economy could be “perilously close to a worse outcome” even before accounting for overstated payrolls.
“The FOMC should therefore view the full employment side of its dual mandate as under more pressure than the inflation side for now,” Holt wrote. He suggested that this dynamic should motivate a rate cut in January, even if it is what he called a “plug‑your‑nose‑on‑moral‑hazard cut.” Holt emphasized that job growth and income growth are critical drivers of consumption, meaning the jobs side of the Fed’s mandate now warrants more weight than inflation.
December’s unemployment rate edged down slightly to 4.4% from 4.5%, but Holt stressed that headline figures alone do not reflect the labor market’s underlying fragility. The broader trend—especially when excluding health care hiring—indicates that the economy may be approaching a tipping point, one that could force the Fed to act sooner than markets currently anticipate.
As the U.S. enters 2026, policymakers will be closely monitoring upcoming payroll revisions and sector-specific employment trends. While the labor market may appear resilient at first glance, the deeper data suggest that a January rate cut is increasingly plausible, signaling a shift in focus from inflation concerns to sustaining full employment.
