David Rosenberg, the former Chief North American Economist for Merrill Lynch known as the "Wall Street Soothsayer," recently stated that the U.S. economy faces significant challenges in 2026, with the job market potentially experiencing a sharp contraction. This would weaken the economic outlook and force the Federal Reserve to undertake dramatic and aggressive interest rate cuts. Rosenberg remarked in an interview, "The biggest surprise [this year] will be the realization that the labor market isn't cooling; it's contracting."
Currently, the U.S. unemployment rate has climbed from 4% at the beginning of last year to 4.6% as of last November. Rosenberg anticipates the unemployment rate will soon breach the 5% mark and stated it is "highly likely to test the 6% level before the year's end."
Rosenberg believes that, despite the gap in official economic data caused by the prolonged U.S. government shutdown in 2025, the released labor market reports clearly show cracks are emerging. A recent report indicated that the U.S. layoff rate rose to 1.2% last October, the highest level in a year. While this remains low, it suggests the bottom has been reached and the trend is now upward.
Rosenberg pointed out that the trend in layoffs is on a moderate upward path. Simultaneously, he stated that the hiring rate is "plummeting like a hot knife through butter." The Conference Board's consumer confidence survey includes a "labor market differential index," which measures the gap between consumers' perceptions of plentiful versus hard-to-get jobs. This index fell to 5.9 last December, hitting a new low since the peak of the COVID-19 pandemic in February 2021.
In a post on platform X, Rosenberg noted, "When you cross-reference the JOLTS hiring/firing rates with The Conference Board's 'jobs plentiful/jobs hard to get' series, the resulting future picture is: unless these indicators reverse, the unemployment rate is destined to test the 6% level."
Currently, many on Wall Street believe the weakness in these labor market indicators could reverse, citing the stimulus measures from the tax plan (the "Big and Beautiful Act") passed last July, which take effect this month. For instance, as part of this legislation, Americans are expected to receive larger tax refunds than previously anticipated. However, Rosenberg argues that these IRS refunds will only provide a temporary burst of consumption, effectively "borrowing from the future." As consumers see wage growth slow, overall spending will shrink.
Consequently, Rosenberg's current view starkly contrasts with the consensus among Wall Street economists, who predict the U.S. labor market will remain stable and the Fed will cut rates once or twice in 2026. The median projection from the Fed officials' dot plot is for one rate cut this year. However, the Fed has emphasized that it sees downside risks in the labor market. The latest Fed staff forecast report states, "A moderation in labor market conditions coupled with heightened economic uncertainty has increased the risk of economic weakness exceeding expectations."
Will the Fed be forced to cut rates to 2.25%? Rosenberg stated that a collapse in the labor market and a subsequent recession would force the Fed to slash rates by 125 basis points to 2.25% by the end of this year. "What determines the Fed's rate path isn't politics, nor whether Kevin Hassett, Kevin Warsh, or Kevin Costner becomes Fed Chair," he quipped, "Data is the driving force behind the Fed's decisions."
So, if a wave of layoffs is set to spread, why are U.S. unemployment benefit claims still currently low? Rosenberg indicated one reason might be that the employment downturn is primarily impacting white-collar workers who receive severance packages upon leaving their jobs. "They typically wait until their severance pay runs out before applying for unemployment benefits," he explained.
As for the strong 4.3% GDP growth in the third quarter of last year, Rosenberg dismissed this figure, calling it a "complete illusion." He believes a more reliable indicator is personal income excluding government transfer payments—after inflation adjustment, this measure has been essentially flat over the past two quarters. Trump's tariff policies masked the truth of weak income growth: a sharp contraction in imports boosted GDP and consumer spending, but at the cost of a significant decline in the savings rate.
Rosenberg also mentioned he is not currently worried about inflation, even though the inflation rate has been above the Fed's 2% target for nearly five consecutive years. He pointed out that as Trump's tariff policies peak and housing prices continue to soften, prices will stabilize. He predicts that a year from now, both the inflation rate and core price increases will be at or below the Fed's target.
Currently, many economists blame supply factors for the U.S. labor market weakness, but Rosenberg considers this view mistaken. "The truth is always reflected in the prices, and labor price growth is slowing," he stated, "Therefore, I believe both the hawks and the bond bears are wrong."
