Summary

• The US labor market is showing signs of a potential turnaround in 2026, with private payrolls posting the best numbers in over a year, suggesting the worst of near-term weakness may be behind us.
• Despite strong household demand and record corporate profitability, hiring and wage growth remained subdued last year; the key macro question for 2026 is whether increasing corporate capex and demand will finally boost these metrics.
• An exceptionally tight labor supply, with prime-age employment rates at multi-decade highs, implies that further job gains will likely necessitate hiring from more marginal groups or bidding up wages for existing workers.
• The author concludes that recent labor market data gently pushes the odds in favor of nominal incomes rising to meet strong household spending, rather than spending contracting, setting a more positive economic environment for 2026.

=== MARKET IMPLICATIONS === * Economic Outlook: The analysis suggests a more robust and positive economic outlook for 2026 than previously anticipated, driven by potential labor market strength and rising incomes. * Inflationary Pressures: A pickup in job growth, combined with tight labor supply and potential wage increases, could lead to renewed inflationary pressures, impacting monetary policy expectations. * Interest Rates: A stronger labor market and potential for higher inflation could prompt the Federal Reserve to maintain a more hawkish stance, delay anticipated rate cuts, or even consider tightening, leading to higher interest rates. * Sector Performance: Consumer Discretionary sectors are likely to benefit from sustained strong household spending and rising incomes. Industrials could see tailwinds from increased corporate capex and business expansion. Fixed income assets, particularly longer-duration bonds, could face headwinds from rising rate expectations. Small-cap US equities, often more sensitive to domestic economic health, could also see a boost.