The U.S. economy is facing a world of trouble in 2026, with the likelihood of a sharp contraction in employment that will weaken the economy and force the Federal Reserve to respond with dramatic rate cuts, said David Rosenberg, the former Merrill Lynch economist who since 2020 has run his own firm, Rosenberg Research.
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"The big surprise will be the realization that this labor market is not cooling," Rosenberg said, in an interview with MarketWatch. "It's contracting."
The U.S. unemployment rate will 'quite possibly test 6% by the end of the year.'David Rosenberg, Rosenberg Research
The unemployment rate has risen to 4.6% in November from 4% at the beginning of the year. Rosenberg thinks it will soon break above 5% and "quite possibly test 6% by the end of the year," he said.
Despite a long-running government shutdown in 2025 that resulted in gaps in official economic data, it is clear from the labor-market reports that have been released that cracks are emerging.
A recent report showed the rate of layoffs in October rose to 1.2%, the highest in a year. While this is still low, it shows a bottom has been hit and the trend points higher. "The firing trend is on a gentle uptrend," Rosenberg said. At the same time, he said, the hiring rate has "plunged like a hot knife though butter."
A separate survey of consumer confidence by the Conference Board includes the so-called labor-market differential, which measures the gap between consumers viewing jobs as plentiful and as hard to get. It has fallen to 5.9 in December, the lowest level since the depths of the coronavirus pandemic in February 2021.
"When you cross-reference the JOLTS hiring/firing rate with the Conference Board's job plentiful/hard to get series, what you see is a future where the unemployment rate is destined to test the 6% mark barring a reversal in these metrics," Rosenberg said, in a post on X.
Wall Street thinks these metrics might reverse because of stimulus measures in the Republican tax plan that passed last July that go into effect this month. For instance, as part of that legislation, Americans are expected to receive larger tax refunds than they might have previously anticipated.
Rosenberg said that these refunds from the IRS will provide only a temporary burst of spending that borrows from the future. Overall spending will be curtailed as consumers see declining wage growth.
Rosenberg is far out of step with the consensus among Wall Street economists, which foresees a stable labor market and one or two Fed rate cuts in 2026.
'It will not be politics that determines where the Fed's interest rate is going to be going. It is not whether Kevin Hassett, Kevin Warsh or Kevin Costner [is] Fed chair. The data will drive the Fed.'David Rosenberg
The median forecast of Fed officials is for one rate cut this year. But the central bank has stressed that it sees downside risks to the labor market. The most recent staff forecast from the Fed noted that "softening labor-market conditions and elevated economic uncertainty [had] raised the risk of a sharper-than-expected weakening in the economy."
Rosenberg said the collapse of the labor market and a subsequent recession will force the Fed to cut rates by 125 basis points to 2.25% by the end of the year.
"It will not be politics that determines where the Fed's interest rate is going to be going. It is not whether Kevin Hassett, Kevin Warsh or Kevin Costner [is] Fed chair," he said. "The data will drive the Fed."
If there is a rise in layoffs, why have jobless claims remained so low? Rosenberg said one reason could be that the employment downturn has been hitting white-collar workers who get pay packets as they leave. "So they typically wait for those pay packets to run their course and then they'll apply for benefits," he said.
What about the strong 4.3% GDP growth in the third quarter? Rosenberg was dismissive of the data, calling it "the mother of all fugazies."
A better statistic is personal income minus government transfers, which has been flat when adjusted for inflation for the last two quarters. This weak income growth has been "papered over" by tariffs, which have caused imports to collapse - positives for GDP and consumer spending that come at the cost of a steep drop in savings.
Rosenberg said he wasn't concerned about inflation, which has been higher than the Fed's 2% target for almost five years. Prices will ease with Trump's tariff policy having passed its peak and with continued softness in housing prices, he said. A year from now, inflation and core price gains will be at or below the Fed's target, he said.
Many economists blame supply factors for weakness in the labor market, but Rosenberg said they're wrong. "The truth is always in the price, and the price of labor is decelerating," he said. "So I think the hawks and the bond bears are on the wrong side of the call."
So is this just the latest call of a permabear who might be right in the same way a broken clock is correct twice a day? Rosenberg said that, once the media labeled him a bear before the global financial crisis of 2008-09, it has been hard to shake the label. But he noted that there have been periods in which he's been bullish, in particular between 2011 and 2017.
Rosenberg did incorrectly predict a recession in 2022. He said he made the call in part because of the Fed's monetary-policy tightening to combat inflation. He was wrong, he admitted, because he didn't recognize how strong the labor market was.
"I don't worry about the past, and I try to learn from my mistakes. I'm a data junkie, and I analyze the broad trends," he said. "The data is the data. This is what it's telling me."
