The Federal Reserve kicked off the year by declining to make any rate changes at their January board meeting, citing solid economic expansion and lingering inflation. The federal funds rate remains at 3.5 percent, with two dissenters arguing for deeper cuts. President Trump has been a constant critic of current Chair Jerome Powell’s reluctance to cut rates, and the Fed will have a new chair this May.

Some interesting notes from the Fed’s January Beige Book include an uptick of economic activity not seen for several months, a modest increase in consumer spending mostly driven by wealthier individuals, and a softening of the real estate market. Overall outlooks from each of the Fed districts were tepidly optimistic.

The book also notes that steady labor market conditions, with most districts reporting little change in hiring and firms primarily backfilling positions rather than expanding payrolls. Use of temporary workers increased in some areas as businesses sought flexibility amid uncertainty. Skilled labor shortages persisted in engineering, health care, and the trades, though job switching appears to have slowed.

Price pressures continued at a moderate rate across most districts, with tariffs cited as the main source. As pre-tariff inventories were depleted, more firms began passing higher input costs on to customers, though some sectors such as retail and restaurants hesitated due to consumer price sensitivity. Regionally, conditions varied: New York reported modest declines, while areas such as Cleveland (Pittsburgh’s home district) and San Francisco noted mild growth.

The ongoing tariffs remain a concern that won’t fade. As of mid-January, the U.S. annual inflation rate was at 2.7 percent, unchanged from November of last year. Core inflation, which excludes food and energy, registered at 2.6 percent, the lowest level since early 2021.

Overall, the takeaway from the Beige Book is cautiously optimistic, but this is not reflected in consumer sentiment. According to the Conference Board’s latest release, the U.S. consumer confidence dropped 9.7 points to 84.5. That’s the lowest level in more than 11 years. The drop was attributed to rising concerns about the labor market and persistent high prices. It was broad-based across income levels and political affiliations, with the sharpest deterioration among older consumers and both lower and higher-income households. While the link between confidence and spending has been inconsistent in recent years, economists noted that weakening labor market perceptions and stagnating real incomes could signal more cautious consumer behavior ahead.

Affordability pressures remain central to consumer anxiety. Survey responses frequently referenced high prices for food, energy, and insurance, along with tariffs and broader economic uncertainty. Housing affordability continues to strain households, with home prices rising 0.6 percent in November and up 1.9 percent in 2025, while high material and borrowing costs constrain new construction.

Consumer spending stalled in December, putting a weak finish on the 2025 holiday shopping season. Retail sales were flat for the month after a solid 0.6 percent gain in November, missing expectations for a 0.4% increase. Sales excluding autos were also unchanged. On a year-over-year basis, retail sales rose 2.4%, down from November’s 3.3% pace and trailing December’s 2.7% inflation rate — meaning real spending likely declined. The closely watched “control group,” which feeds directly into GDP calculations, slipped 0.1% for the month, potentially tempering expectations for fourth-quarter growth.

Spending patterns reflected a split consumer environment. Higher-income households continued to spend, but middle- and lower-income consumers pulled back, particularly on tariff-sensitive goods. Furniture, clothing, electronics, and miscellaneous retail categories all posted declines, while online sales barely rose.

Consumers’ views of job availability also deteriorated significantly. The share who said jobs were “plentiful” fell to 23.9 percent, the lowest since early 2021. Those saying jobs were “hard to get” rose to nearly 21 percent. The labor market differential, a gauge closely correlated with the unemployment rate, dropped to its lowest level in nearly five years.

But the Bureau of Labor Statistics reported that the unemployment rate held steady at 4.3 percent in January, with 7.4 million Americans classified as unemployed. While conditions were largely unchanged from December, the jobless rate remains higher than a year ago, when unemployment stood at 4.0 percent and 6.9 million people were unemployed. Labor force participation was 62.5 percent, and the employment-population ratio was 59.8 percent — both essentially flat, continuing a pattern of limited movement over the past year.

Long-term unemployment, defined as joblessness lasting 27 weeks or more, remained at 1.8 million people, accounting for 25 percent of all unemployed individuals. While stable over the month, that figure is up by 386,000 compared to a year earlier. The number of people working part time for economic reasons declined sharply by 453,000 to 4.9 million, though it remains higher than last year. Meanwhile, 5.8 million people outside the labor force reported that they currently want a job but were not counted as unemployed because they were not actively seeking work or were unavailable.

The BLS Employment Situation report for January showed total nonfarm payroll employment increased by 130,000 in January, while the unemployment rate held steady at 4.3 percent. The labor market continues to expand, but at a measured pace. Notably, payroll growth averaged just 15,000 per month in 2025 after annual benchmarking revisions, a significant slowdown from prior estimates.

Sector-by-sector, the gains were concentrated in a few industries. Health care led with 82,000 new jobs, followed by social assistance (+42,000). For construction readers, the headline is that construction added 33,000 jobs, driven primarily by nonresidential specialty trade contractors (+25,000). That’s meaningful given that construction employment was essentially flat throughout 2025.

Losses were concentrated in federal government employment (-34,000), continuing a sharp pullback since its October 2024 peak, and in financial activities (-22,000), particularly insurance. Most other major industries—including manufacturing, retail, transportation, professional services, and leisure and hospitality—were effectively unchanged. Wage growth remains steady but not accelerating. Average hourly earnings rose 0.4 percent in January to $37.17, up 3.7 percent over the past year. The average workweek ticked up slightly to 34.3 hours.

Additionally, the annual benchmark revision significantly lowered previously reported 2025 job growth, cutting total gains from plus 584,000 to plus 181,000. March 2025 payroll levels were revised downward by 898,000 jobs. That revision changes the tone of last year’s labor market narrative. Growth was present, but far more modest than initially reported.

The payroll processing firm ADP reported less optimistic numbers, with employers adding just 22,000 jobs. This was well below expectations and down from December’s revised 37,000 gain. Without a 74,000 surge in education and health services, overall hiring would have been negative. The data continues the pattern seen throughout 2025: a low-hire, low-fire labor market where employers remain cautious. ADP also revised prior figures lower, estimating that job growth last year was weaker than initially reported by roughly 18,000 jobs per month.

However, several sectors contracted, including professional and business services (-57,000), other services (-13,000), and manufacturing (-8,000). Mid-sized firms (50–499 employees) accounted for essentially all job growth, while large companies reduced payrolls. Wage growth held steady, with job stayers seeing pay increases of 4.5 percent. 

Turning to construction, contractors entered 2026 with noticeably less optimism than they had a year ago, according to the 2026 AGC/Sage Construction Hiring and Business Outlook Survey. While expectations remain positive for 12 of 17 project categories, confidence has narrowed sharply outside of data centers and power projects. Data centers posted a net positive outlook of +57 (up 15 points from last year), and power projects came in at +34. Most other sectors saw declining sentiment, though hospitals (+20), other healthcare (+24), water and sewer (+16), manufacturing (+15), transportation (+11), and bridges/highways (+10) remained positive.

Multifamily barely held positive at +4, while K-12, higher education, lodging, private office, and retail slipped into negative readings — with office (-14) and retail (-18) the weakest. Additionally, one-third of firms reported being affected by immigration enforcement, either directly or through subcontractors.

Total construction spending reached a $2.18 trillion annual rate in October, up 0.5 percent from September but down 1.0 percent year-over-year. Private residential spending rose 1.3 percent for the month, largely driven by a 4.5 percent jump in home improvements, though single-family construction fell 1.3 percent and multifamily dipped 0.2 percent. Private nonresidential spending declined 0.2 percent for the month and 2.6 percent year-over-year, with manufacturing construction down for the ninth consecutive month (-9.7 percent year over year). Public construction edged up 0.1 percent for the month and 2.1 percent year-over-year, with modest gains in highways and education offset by slight declines in sewage and waste projects.

Construction starts data presents a more mixed and forward-looking picture. ConstructConnect reported total starts up 3.1 percent year-over-year in December and 8.2 percent for the full year, led by strong gains in nonresidential building and civil work, including airports and power projects. However, residential starts slumped sharply year-over-year, particularly in multifamily. Dodge data showed monthly volatility: nonresidential starts fell in December, manufacturing pulled back sharply, but highways, bridges, hotels, and data centers posted gains. Meanwhile, housing starts declined 4.6 percent for the month, and the Architecture Billings Index remained below 50 for the 14th straight month, signaling continued softness ahead. A large majority of architecture firms reported delayed, stalled, or canceled projects, reinforcing the cautious outlook for nonresidential construction in the year ahead.

Meanwhile, signals for manufacturing construction are mixed. Some project trackers report that cancellations and downsizing are outpacing new investments in 2025, with billions in planned spending abandoned. At the same time, major corporations including semiconductor, automotive, and advanced manufacturing firms continue announcing large-scale U.S. expansions.