Employment report February 2026

Cold snap brings a cold labor market reality

• Nonfarm payrolls fell by 92,000, largely unwinding January’s gains and revealing broad‑based weakness. The unemployment rate rose to 4.4%, signaling that labor market slack is re‑emerging rather than stabilizing. Population‑control revisions compounded the weakness and revealed a materially slower labor supply with labor force participation at its lowest level in nearly five decades, outside of the pandemic recession.
   
• Downward revisions of 69,000 to nonfarm payrolls over the prior two months provide further evidence of fading momentum. As a result, the three‑month average of job gains has slipped to 6,000 jobs, well below the breakeven pace of roughly 30,000 needed to keep unemployment stable. That gap points to upside risk to the unemployment rate in the months ahead.
   
• To be sure, some of the weakness reflects temporary factors including unusually harsh winter weather and strike‑related disruptions in healthcare. But the downside surprise is a striking illustration of what can happen when the foundation of job growth becomes increasingly concentrated – even modest shocks can produce outsized employment swings. That fragility is especially concerning against a backdrop of rising geopolitical tensions, where renewed supply-side shocks risk pushing the economy toward a stagflationary mix the Fed is keen to avoid.
   
• From a policy standpoint, the February report and latest geopolitical developments complicate the Fed’s job by raising risks on both sides of the dual mandate. The sharp pullback in payrolls, the rising unemployment rate and weaker labor supply backdrop heighten concerns around downside to growth and employment, while the conflict in the Middle East raises inflation risk. That combination is likely to leave the Federal Open Market Committee more internally divided on where the greater threat lies. We still expect 50 basis points of easing in H2 2026, with rate cuts in July and December.

At the sector level, private sector payrolls fell by 86,000 in February, reflecting broad‑based weakness across weather‑sensitive industries. Construction employment declined by 11,000, while leisure and hospitality shed 27,000 jobs, led by losses in food services and accommodation. Transportation and warehousing employment fell by 11,000, driven by a sharp pullback in couriers and messengers, while retail employment barely rose. Healthcare payrolls declined by 28,000, reflecting payback from January’s outsized gains and the impact of labor disruptions, with roughly 31,000 healthcare workers on strike during the survey period. The strike was most visible in a 37,000 decline in physician offices employment, a drag that should reverse in March. 

Beyond these weather‑ and strike‑affected sectors, hiring was weak across much of the services sector. Professional and business services employment fell by 5,000, with continued declines in administrative support and temporary help services. Information employment declined by 11,000, marking the fourteenth consecutive month of job losses, while goods‑producing employment fell by 25,000 as manufacturing payrolls contracted by 12,000. Government employment edged lower by 6,000, with federal job losses continuing to weigh on the headline.

Wage dynamics were firmer than expected. Average hourly earnings rose by 0.4% month over month, pushing annual wage growth a tick higher to 3.8% year over year and underscoring that labor cost pressures remain sticky even as job growth falters. Still, forward‑looking indicators point to continued moderation in wage growth, with the private sector quits rate remaining near its lowest level since early 2016 outside of a recession and business surveys continuing to signal restraint in compensation plans. As labor demand remains subdued, we expect wage growth to drift toward 3.5% in the second half of the year.

Population dynamics added another layer of softness to the February data. The report incorporated delayed revisions to household‑survey population controls following the government shutdown. These revisions reflect slower population and labor‑force growth, driven in part by updated Census methodology and weaker net immigration. As a result, the civilian noninstitutional population was revised down by 231,000, while the labor force and employment levels were each revised lower by roughly 1.4 million. Because the Bureau of Labor Statistics does not revise historical household‑survey data, month‑to‑month comparisons of employment and labor‑force growth around February should be interpreted with caution.

The revisions revealed a materially weaker labor‑supply backdrop than previously assumed. In February, the labor force participation rate slipped by 0.1 percentage point (ppt) to 62%, now standing 0.5ppt below pre-revision levels. This marks its lowest point since March 1977, outside of the pandemic recession, and the decline is driven by both unfavorable demographic shifts and a significant slowdown in immigration. With labor force growth now running materially weaker, the labor market is operating with a much thinner supply buffer, which raises the risk that wage pressures remain sticky even as demand cools.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.