Economic Monitor – Weekly Commentary
by Eugenio Alemán

Employment remains weak, but a recovery is in the cards

January 16, 2026

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The biggest concern for the Federal Reserve (Fed) today is the weakness in employment over the last year, and especially during the second half of the year. This weakness was behind its decision to resume interest rate cuts in September of 2025. Although the weakness in job growth was evident in the goods-producing sector of the economy for a long time, the weakness in employment in the services side of the economy became apparent during the second half of the year, as can be seen in the graph below.

However, there have been recent signs that employment in the services side of the economy is starting to improve. The first expansionary month came in December 2025, with the ISM Services PMI Employment index crossing into expansion territory after several months showing contractionary levels of employment but with incremental improvements since July of 2025. The December reading on the ISM Services Employment index was 52%, the first reading above 50% since a reading of 50.7% in May of 2025.

The biggest problem is that the recent improvement in employment in the services sector remains limited to a few industries, as exemplified by the December 2025 nonfarm payroll report. The report showed basically two sectors increasing employment, the health care and social assistance and leisure and hospitality sectors, adding 38,500 and 47,000 new jobs, respectively during the month.

The increase in jobs from the health care and social assistance sector was expected, as it is a sector that is relatively recession proof while the increase in the leisure and hospitality sector was more of a surprise, especially because it was very strong. But the biggest issue for the Fed is that employment growth in the cyclical sectors of employment, that is, those that follow the ups and downs of the business cycle, are growing at slightly negative rates as of December of last year, as the graph below shows, while health care and social assistance employment is growing but has also slowed down considerably during 2025.

Federal Reserve: Between a rock and a hard place

Now, the question for the Fed is: What to do? Tariffs were, presumably, designed to bring back manufacturing jobs to the US, but that has not happened and, in fact, manufacturing employment has continued to come down since the tariffs were imposed. Some of the explanations for this are that higher imported input costs have meant that manufacturing production has become even less competitive than before in the global economy, and manufacturers have reduced production and thus employment in the sector.

Another potential explanation is that the One Big Beautiful Bill Act (OBBBA) has created important incentives for firms to invest in capital rather than in labor, since capital and employment are competitive (i.e., substitutes) factors in the production process. In fact, according to the Tax Foundation, the manufacturing sector will benefit the most from the OBBBA during the next ten years, to the tune of $423 billion during the 2025-2035 period, with the information industry coming in second with a benefit of $136 billion.*

Thus, why would any one of these industries choose to hire workers when they can invest in capital and at the same time reduce their tax liabilities? In today’s world, the emergence of AI at a time when the supply of labor has been reduced by aging and other policies, i.e., immigration, is adding to the substitution away from labor. If, on top of this, you sprinkle capital investment with full capital expensing, then, as our children would say, it is ‘a no-brainer.’

So, you would probably ask, what does this have to do with Fed policy? The answer is that it has nothing to do with Fed policy. Interest rates cannot undo what these factors are doing. Growth in the labor force is slowing down because of population dynamics (a structural issue) and government policies, i.e., reduced immigration, none of which monetary policy has any influence over, while capital expensing is also a policy decision over which the Fed has no influence. Furthermore, lower interest rates could actually accelerate this process of substitution away from labor and into capital in the production process, aggravating the issues for the US labor market, especially in those sectors most benefited by the OBBBA.

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Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.

US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA HPI is a broad measure of the movement of single-family house prices. The FHFA HPI is a weighted, repeat- sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

The ISM Manufacturing Index: The GDP Now Institute of Supply Management (ISM) Manufacturing Measures the health of the manufacturing sector by surveying purchasing managers at manufacturing firms. The survey asks about current business conditions and expectations for the future, including new orders, inventories, employment, and deliveries.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.

Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.

Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

Source: FactSet, data as of 10/17/2025