December Jobs Report: Will the US economy remain in a “low-hire, low-fire” mode?

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Alexa Hanelin: Welcome to J.P. Morgan's Making Sense. I'm Alexa Hanelin, and today I'm joined by Mike Ferroli, our Chief U.S. Economist, to talk about the takeaways from the December employment report as well as the path ahead for the economy and for the Fed. Mike, thanks for joining us.

Mike Feroli: Thanks for having me. 

Alexa Hanelin: So Mike, we received the first unemployment report for 2026. The headline number was in line with our forecast, but there's been a bit of buzz around the unemployment rate. What stuck out to you here?

Mike Feroli: So we had the unemployment rate move down from what was initially reported as 4.6 percent in November, due to some technical things, rise down to 4.5, and then it moved down again to 4.4 percent in December, which is the same level it was in September. So that, I think, is probably the biggest news coming out of today's report. I think many of the other details were less kind of notable. Job growth at 50,000 is pretty close to the trend we've been seeing, but it's really, as you point out, the unemployment rate, which should ease concerns about growing slack that had been a rising concern in the second half of last year.

Alexa Hanelin: There had been a lot of talk around the disconnect between strong GDP growth and softer job gains. Did the numbers this morning reinforce that narrative, or do you think that we have a little more context here with the unemployment rate?

Mike Feroli: Yeah, definitely. I think it reinforced that narrative. So hours worked increased at only a 0.5 percent rate last quarter, which is a little better than Q3, but still pretty soft. And in addition, given some trade data we saw earlier in the week, it looks like Q4 GDP will probably be strong again. So it looks like we may be in for another quarter of strong productivity growth, which is arithmetically how you link the weak jobs and strong GDP, which comes on the back of what we saw earlier in the week, which is Q3 productivity growth was reported strong. So it looks like we're in for another quarter of pretty decent productivity growth. 

Alexa Hanelin: And you've been writing on this for some time. How sustainable do you think the gains in productivity are, and is technology, particularly AI, the major player here?

Mike Feroli: So hard to say in real time. One thing I would say is there may be some transitory supports to GDP growth in the fourth quarter. The other thing I would say is at least through earlier in the year, it looked like AI was not the big driver of productivity so far, this expansion. But it's possible that what is taking place now is that we are starting to finally see some of the AI-related gains in productivity. But as I said, given the data we have in hand, it's really just a hypothesis, and we don't yet have enough granular data to kind of reject or not that hypothesis.

Alexa Hanelin: Shifting a bit to the Fed, it seems like the data today has reinforced that January may be an opportunity to pause, but the actual eases priced into the market have stayed somewhat stable at 50 basis points. You had initially been thinking potentially for an ease in Jan. Have your views changed? And one more question, do you think the Fed's perception is that policy rates are restricted after today's data?

Mike Feroli: Yeah. So even before today's data, I think we were kind of on our heels in terms of expecting a cut later this month. Certainly the rhetoric since the last meeting has probably skewed a little hawkish. I think after today, it's a good opportunity for the Fed to finally get some unity on their committee or near unity on their committee by staying on hold later this month. And then I think the interesting question you point out, we still have some eases later in the year in the market. Some of that may reflect that there's always going to be a little bit of a risk of recession priced in. Whether we are restrictive and whether the Fed will perceive we're restrictive, I think the committee has been gradually shifting their estimate of the neutral funds rate higher. And I suspect that process will be continuing, particularly given what we said earlier about GDP growth looking strong yet again. So I think it makes it a little harder to maintain the view that policy rates are restrictive given what we're seeing in a stable unemployment rate and pretty strong GDP growth. 

Alexa Hanelin: Thanks, Mike. You mentioned Fed unity. Maybe a good time to talk about what we expect for the Fed chair seat come May and what it will look like if the Fed chair expresses different views than the rest of the committee in terms of policy rates. Yeah.

Mike Feroli: Yeah so at least given media reports, it sounds like it's coming down to the two Kevins, Warsh and Hassett or Chris Waller. I think any of those choices, were they to express a view that's materially out of line with the rest of the committee would see their power as chair eroded. And a lot of that power arises from the fact that the chair moves toward the center of the committee in order to build consensus. And so if a chair thinks he can come in and just push around the rest of the committee, I think that there will be, as I said, quickly find that his power as a chair eroded. So I guess I am less convinced than apparently some market pricing that a new Fed chair can come in and just bend the committee to his will rather than a nudging the committee in a direction that, you know, more in a direction that, that he would like to go rather than totally, you know, engineering and about face and policy.

Alexa Hanelin: Totally. And it feels like the market is pushing back on that narrative as well. And staying sticky at 50 basis points and not pricing in some of the suggested deeper cuts that the, an incoming Fed chair could push for. Mike, can we briefly talk about the SCOTUS cases that are sort of looming? There was some expectation of receiving the IEPA decision today, which feels the most paramount. Any thoughts around that or any other cases that you're looking at with some importance?

Mike Feroli: Yeah. So I guess we're not going to get the IEPA ruling today. It appears we still would expect it pretty soon. And while I'm not a expert court watcher, and certainly from your arguments, it sounds like the court is inclined to toss out the IEPA tariffs as inconsistent with the law. Now, I think general expectations have been that the, and this is consistent with things we've heard from Jameson Greer, the US trade representative. Those expectations have been that the administration would essentially rebuild tariffs via more legal means, such as Section 301, Section 302, various anti-dumping, countervailing duty type provisions to get back to an effective average tariff rate that looks like what we have now. I think the risk around that is that the administration uses overturning IEPA as a face-saving way to climb down from some of the tariff increases put through last year given the administration's concerns about affordability as we head into the midterms. The other big court case we're going to be watching, January 21st, is when the court will hear arguments in the case of Lisa Cook as to whether the administration can remove her from her seat as Fed governor. So that's when the hearing is, we'll get the ruling, I don't know, maybe a few weeks subsequent to that. But those are the two major court cases that are on our radar right now. 

Alexa Hanelin: Mike, consumer spending has held up surprisingly well, even as real income growth has slowed. How long do you think consumers can keep smoothing through these headwinds? And do you see any risk to the resilience? 

Mike Feroli: Yeah, so I think consumers look like they're in decent shape. Given today's numbers, it looks like nominal labor income probably grew at a 4.3% annual rate. You take off about 2-ish percent for headline inflation. That still gives you about 2% real income growth, which all else equal could support easily 2% real consumer spending growth. So it does look like at least in the aggregate, consumer spending should be well supported. Now, as is well known, aggregates can mask a lot of heterogeneity, and there probably is some bubbling concerns about lower income consumers. You had a little bit of a deterioration in Q3, some credit metrics in Q3. But so far, I think the picture looks like consumer spending is pretty well supported for the near term, at least.

Alexa Hanelin: Thanks. Inflation remains sticky, and wage growth seems to be moderating. Mike, what's your outlook for inflation as we move through 2026? And is there risk for reacceleration or a sharper slowdown? 

Mike Feroli: So we actually think inflation in the coming year will look somewhat similar to what it did last year, which is to say core inflation, the high twos. We do think we still have in the first half of the year some probably lingering tariff price pass-through into goods prices. And then we're going to also, in both December and the December report, and the April report, have some technical factors that could boost inflation in those two months, given some lingering issues that the government shut down affected the data. So I think that's another thing that will keep inflation a little bit on the high side in coming months. 

Alexa Hanelin: Thanks, Mike. Last question for you. There have been some recent changes in fiscal policy, like the end of the enhanced ACA credits and the new tariffs, as we had spoken about earlier on the call. How do you see these developments impacting household income and consumer behavior in the coming months?

Mike Feroli: Yeah, so the ACA, the lapsing of the enhanced premium support for ACA, Affordable Care Act, should be ahead of about $25 billion to household incomes, or about roughly a tenth of a percent. Going in the other direction, though, it looks like in both withholdings starting in January, as well as higher refunds in April, the new tax cuts in the one big beautiful bill should support consumer incomes by about $150-ish billion, or about a half percent of GDP. And then finally, last thing on fiscal, it looks like we should probably avoid another government shutdown at the end of the month. So hopefully we'll have some uninterrupted data flow for a while to come.

Alexa Hanelin: Hopefully. That would be ideal. Well, that's all from me. I feel like we covered a lot of ground today. Thank you so much, Mike, for joining us and sharing your thoughts. I look forward to hearing updates next month on the podcast. And to our listeners, thank you so much for tuning into this episode of Making Sense. We hope you join us again soon.

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