Shenwan Hongyuan Securities released a research report stating that by 2026, U.S. labor supply may continue to contract while demand gradually stabilizes, with equilibrium employment remaining low. On the supply side, Trump's immigration policies are likely to tighten, targeting the deportation of one million undocumented immigrants in 2026. On the demand side, government layoffs have temporarily paused, and the employment impact of tariffs may weaken, though AI's "substitution effect" persists. The labor market could enter a state of "low-growth equilibrium."
In the near term, the U.S. unemployment rate is more likely to rise than fall, with risks of triggering the "Sahm Rule" again. In the second half of 2025, the gradual uptick in unemployment indicates weakening labor demand. Short-term factors such as tariff shocks, government shutdowns, and AI-driven job displacement will continue to suppress labor demand, increasing the risk of rising unemployment—the Sahm Rule threshold is approximately 4.7%. Until the labor market rebalances, the economy's "K-shaped" divergence will persist, complicating the Federal Reserve's policy decisions. Historically, labor shortages tend to boost labor's income share, while surpluses may exacerbate economic inequality. This "split economy" scenario heightens the Fed's challenge in balancing risks—potentially leaning dovish in the short term but raising inflation risks in the medium term.
Key insights from Shenwan Hongyuan include: 1. Since mid-2025, U.S. nonfarm payroll growth has plummeted, elevating unemployment risks. What drove this reversal? How significant is AI's role? Will "jobless growth" persist in 2026?
**I. Hot Topics: Reversal and Rebalancing—2026 U.S. Labor Market Outlook** **(1) AI and Jobs: Creation or Destruction?** AI's "demand shock" has drawn attention, but its impact remains largely structural. U.S. corporate AI adoption rose from 3.7% two years ago to 10% (September 2025). October layoffs surged 175% YoY to 153,000, with 21.7% from tech. AI's structural effects are most visible in high-exposure industries, younger workers, and high-wage roles. However, AI is unlikely the primary driver of 2025's labor slowdown, evidenced by: - Weak correlation (R²=0.09) between AI adoption and employment trends since 2023. - No acceleration in occupational shifts. - AI-adopting firms prefer retraining over layoffs.
**(2) 2025’s Labor Reversal: Immigration and Government Layoffs Played Larger Roles** 2025 saw dual weakness in labor supply and demand ("low hiring, low firing"). The payroll slump reflected synchronized supply contraction (e.g., net undocumented immigration fell by 1.6–2 million, explaining ~50% of the slowdown) and demand softening (government layoffs accounted for 37%, tariffs slowed job growth in sensitive sectors by two-thirds, while white-collar roles contributed only 7.6%).
**(3) 2026: Rebalancing Amid Near-Term Demand Weakness** By 2026, labor supply may keep shrinking (with Trump’s deportation targets), while demand stabilizes (tariff effects fade, but AI substitution lingers). The market could reach "low-growth equilibrium." Short-term unemployment risks persist, with the Sahm Rule threshold at 4.7%. Pre-rebalancing, the Fed faces a dilemma: labor scarcity boosts wages but excess fuels K-shaped divergence, complicating policy between short-term easing and medium-term inflation risks.
**Risks:** Escalating geopolitics; sharper-than-expected U.S. slowdown; Fed turning unexpectedly hawkish.
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