Shen Wan Hongyuan: The US job market may gradually achieve “rebalance” in 2026, but weakening short-term demand is still the core contradiction

The Zhitong Finance App learned that Shenwan Hongyuan Securities released a research report saying that in 2026, the US labor supply may continue to shrink, demand will gradually stabilize, and break-even employment will remain low. On the supply side, Trump's immigration policy is tight and difficult to relax. The goal is to repatriate one million illegal immigrants in 2026; on the demand side, government layoffs have come to an end, and tariffs have impacted or weakened employment, but the “replacement effect” of AI on employment still exists. The labor market may present a “low growth balance.”

In the short term, the US unemployment rate will continue to rise and fall, and we are concerned about the risk of triggering the “Sam's Rule” again. In the second half of 2025, the unemployment rate slowly rose, indicating that labor demand has become a “shortcoming.” In the short term, tariff shocks, government shutdowns, and the substitution effects of AI will still suppress labor demand and increase the risk of rising unemployment — once again triggering the “Sam Rule” threshold of around 4.7%.

Before the labor market was “rebalanced,” the “K-type” division of the economy was difficult to change, and the Federal Reserve faced a “dilemma” in its decision-making. Empirically, labor shortages can help increase labor share, and excess can lead to a “K-shaped” division of the economy. This “double ice and fire” situation makes it more difficult for the Federal Reserve to balance risks — it may increase easing tendencies in the short term, or increase the risk of inflation in the medium term.

Shen Wan Hongyuan's main views are as follows:

Since mid-2025, there has been a “cliff-style” decline in new non-farm payrolls in the US, and the upward risk of unemployment has increased. What is the reason for the “big reversal” in the US job market and how big is the “substitution effect” of AI? Will America's “jobless growth” continue in 2026?

I. Hot Thoughts: Major Reversal and Rebalance - US Job Market Outlook 2026

(1) AI and Employment: Creation or Destruction? “Structural shock” is reflected, but the overall drag is limited

The “demand shock” of AI on the US job market has attracted market attention, but currently it is mainly structural. The adoption rate of AI in US companies has risen from 3.7% 2 years ago to 10% (September 2025); in October, the number of challengers laid off 153,000 employees, an increase of 175% over the previous year, of which 21.7% came from the technology industry; in summary, the structural impact of AI is reflected in three major aspects: industries with high AI exposure, young people in the workplace, and high-paying jobs.

Overall, however, AI may not be the main reason for the weakening of US employment in 2025. The main basis is: 1) Since 2023, the negative correlation between the increase in AI adoption rate and changes in employment growth rate is weak (R²= 0.09); 2) there is no sign of acceleration in residents' occupational restructuring; 3) Among enterprises applying AI, companies are more inclined to “train” employees rather than lay off employees.

(2) The main reason for the “big reversal” in US employment in 2025: immigration, government layoffs or greater impact

Looking back at 2025, both supply and demand in the US job market weakened, showing “low recruitment and low layoffs.” In 2025, the “big reversal” in the number of new jobs in the US was the result of shrinking supply and weakening demand resonance. Furthermore, since the speed of supply contraction basically matches the rate at which demand weakens, the labor market basically maintained a “low growth balance” state until recently showing signs of loosening.

On the supply side, the net inflow of illegal immigrants may explain about half the drop in the number of new jobs. According to CBO and the San Francisco Federal Reserve forecast, the net inflow of illegal immigrants to the US in 2025 fell by 160-2 million compared to last year, which can roughly explain the cooling of new non-farm payrolls by about 50% this year; under the impact of Trump's tightening immigration control policies, “break-even employment” fell back to 30,000 to 80,000 in 2025.

On the demand side, government layoffs, the “cost impact” of tariffs, and the “substitution effect” of AI are the main explanations. In 2025, the government sector's impact on the cooling of non-farm payrolls was 37%, and the impact of the government shutdown may be reflected in subsequent data; the growth rate of US tariff-sensitive employment slowed by 2/3 compared to last year, and the impact continues to expand; the white-collar industry's explanation for the weakening of non-farm payrolls this year is only 7.6%.

(3) In 2026, the US job market may gradually achieve “rebalance”, but weakening short-term demand is still the core contradiction

In 2026, the US labor supply may continue to shrink, demand gradually stabilizes, and break-even employment remains low. On the supply side, Trump's immigration policy is tight and difficult to relax. The goal is to repatriate one million illegal immigrants in 2026; on the demand side, government layoffs have come to an end, and tariffs have impacted or weakened employment, but the “replacement effect” of AI on employment still exists. The labor market may present a “low growth balance.”

In the short term, the US unemployment rate will continue to rise and fall, and we are concerned about the risk of triggering the “Sam's Rule” again. In the second half of 2025, the unemployment rate slowly rose, indicating that labor demand has become a “shortcoming.” In the short term, tariff shocks, government shutdowns, and the substitution effects of AI will still suppress labor demand and increase the risk of rising unemployment — once again triggering the “Sam Rule” threshold of around 4.7%.

Before the labor market was “rebalanced,” the “K-type” division of the economy was difficult to change, and the Federal Reserve faced a “dilemma” in its decision-making. Empirically, labor shortages can help increase labor share, and excess can lead to a “K-shaped” division of the economy. This “double ice and fire” situation makes it more difficult for the Federal Reserve to balance risks — it may increase easing tendencies in the short term, or increase the risk of inflation in the medium term.

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