The former Merrill Lynch broker , known as the "Wall Street prophet" David Rosenberg, chief economist for North America, recently stated that the U.S. economy faces numerous challenges in 2026, with a potential sharp contraction in the job market that would weaken the economic outlook and force the Federal Reserve to take dramatic and aggressive interest rate cuts.
In an interview, Rosenberg said, "(This year's) biggest surprise will be the realization that the labor market is not cooling down, but shrinking."
Currently, the US unemployment rate has climbed from 4% at the beginning of last year to 4.6% in November. Rosenberg predicts that the unemployment rate will soon break through the 5% mark and says that "it is very likely to test the 6% mark before the end of the year."
Rosenberg believes that although the prolonged US government shutdown in 2025 will create gaps in official economic data, published labor market reports clearly show that cracks are emerging.
A recent report shows that the U.S. layoff rate rose to 1.2% in October, the highest level in a year. While this is still relatively low, it indicates that the bottom has been reached and the trend is upward. Rosenberg points out that the layoff trend is on a gentle upward trajectory. Meanwhile, he says the hiring rate is "plummeting like a hot knife through butter."
The Conference Board's consumer confidence survey includes a "Labour Market Difference Index," which measures the gap in consumers' perceptions of job abundance versus scarcity. This index fell to 5.9 in December, its lowest level since February 2021, the peak of the COVID-19 pandemic.
Rosenberg posted on the X platform, "When you cross-reference JOLTS’s hiring/layoff rates with the Conference Board’s 'job abundance/job scarcity' data, the picture of the future is that unless these indicators reverse, the unemployment rate is destined to test the 6% mark."
Many on Wall Street believe the weakness in these labor market indicators may be reversing, as stimulus measures from the Big and Beautiful tax plan passed last July will take effect this month. For example, as part of this legislation, Americans are expected to receive more tax refunds than previously anticipated.
But Rosenberg argues that these IRS refunds only provide a temporary burst of spending that "borrows from the future." Overall spending will decrease as consumers see slower wage growth.
Therefore, Rosenberg's current views are quite different from the consensus of Wall Street economists, who predict that the U.S. labor market will remain stable and the Federal Reserve will cut interest rates one or two times in 2026.
The median forecast in the Federal Reserve officials' dot plot for interest rates is one rate cut this year. However, the Fed has emphasized that it believes there are downside risks to the labor market. The Fed's latest staff forecast report states that "slowing labor market conditions and increased economic uncertainty have raised the risk of a weaker-than-expected economy."
Will the Federal Reserve be forced to cut interest rates to 2.25%?
Rosenberg stated that the collapse of the labor market and the subsequent economic recession will force the Federal Reserve to cut interest rates by 125 basis points to 2.25% by the end of this year.
"The direction of the Federal Reserve's interest rates is not determined by political factors, nor by whether Kevin Hassett, Kevin Warsh, or Kevin Costner (an actor) will become the Fed chairman," he joked. "Data is the driving force behind the Fed's decisions." .
So, if the wave of layoffs continues to spread, why are the number of unemployment claims in the United States still at a low level?
In response, Rosenberg pointed out that one reason might be that the job decline primarily impacted white-collar workers who receive severance pay upon leaving their jobs. "They typically wait until their severance pay runs out before applying for unemployment benefits," he explained.
As for the robust 4.3% GDP growth in the United States in the third quarter of last year—Rosenberg scoffed at the figure, calling it "a complete illusion."
He argues that a more reliable indicator is personal income minus government transfers—an inflation-adjusted figure that has remained largely flat over the past two quarters. Trump's tariff policies have masked the truth about weak income growth: while a sharp decline in imports has boosted GDP and consumer spending, it has come at the cost of a significant drop in the savings rate.
Rosenberg also stated that he is not currently concerned about inflation—despite the inflation rate having been above the Federal Reserve's 2% target for nearly five consecutive years. He pointed out that prices will stabilize as Trump's tariff policies reach their peak and housing prices continue to soften. He predicts that inflation and core price increases will reach or fall below the Federal Reserve's target within a year.
Currently, many economists attribute the weakness in the U.S. labor market to supply-side factors, but Rosenberg believes this view is flawed. "The truth is always reflected in prices, and the growth rate of labor costs is slowing," he said. "Therefore, I think the hawks and bond shorts are wrong."
(Article source: CLS)
