2026's Structural Divergence: Sustained Growth Amid a Shrinking Labor Force

The U.S. economy is navigating a stark structural divergence in early 2026. On one side, the engine of growth is firing on all cylinders, with GDP accelerating. On the other, the labor market-the traditional fuel for sustained expansion-is showing clear signs of erosion. This creates a complex and potentially unstable macro environment where robust output is being sustained by corporate profits and spending, not by a healthy job market.

The growth story is undeniable. The economy expanded at a 4.3% annual rate in the third quarter of 2025, and the Atlanta Fed's GDPNow model now projects a sharp acceleration to 5.4% for the fourth quarter. This momentum is driven by resilient consumer spending and corporate investment, indicating a powerful structural shift where output is being generated more efficiently, perhaps through automation and capital deepening.

Yet the labor market tells a different tale. It ended 2025 on a notably weak note. In December, nonfarm payrolls rose by just 50,000, falling short of expectations and continuing a trend of soft hiring. For the full year, the average monthly gain in jobs was a mere 49,000, a dramatic slowdown from the 168,000 monthly average in 2024. This isn't just a cyclical dip; it reflects a deeper, structural problem.

The core underpinning of this divergence is a shrinking labor force. The labor force participation rate fell to 62.4% in December 2025, down from 62.5% the prior month. This decline, which has been a persistent trend for years, means fewer people are available to work, even as the economy grows. The result is a labor market that is both tight-evidenced by rising wages-and weak, as the sheer number of new jobs created is insufficient to absorb the available workforce or keep pace with population growth.

The bottom line is a fragile setup. The economy is growing at a strong clip, but that growth is being powered by corporate profits and spending, not by broad-based employment gains. As the labor force continues to shrink, this model of growth becomes more vulnerable. It raises questions about the sustainability of consumer demand, the pace of wage inflation, and the economy's resilience to future shocks. The divergence is clear: robust GDP growth is being sustained, but the foundation of a healthy, inclusive economy is eroding.

Drivers of the Split: Corporate Resilience, AI Transition, and Policy

The divergence between robust growth and a weakening labor market is being driven by a specific set of economic forces. At its core is a powerful shift in the engine of expansion, where corporate profitability is now a primary driver, while technological change and policy anchors are shaping the labor market's trajectory.

Corporate resilience is a key pillar of this growth. The preliminary data for the third quarter of 2025 shows a 12.2% increase in corporate profits on a year-over-year basis. This surge in earnings provides the financial fuel for continued investment and spending, allowing the economy to accelerate even as the labor market softens. It signals that companies are not only surviving but thriving, likely through pricing power and operational efficiency. This profitability is what is sustaining the GDP expansion, creating a growth story that is decoupling from traditional employment dynamics.

Simultaneously, the labor market's softness is being partly explained by the ongoing transition to artificial intelligence. Goldman Sachs Research estimates that the adoption of AI will cause a temporary 0.5 percentage point rise in unemployment as displaced workers seek new positions. This is a classic case of technology-driven productivity gains leading to short-term displacement. The analysis suggests that while AI could displace up to 2.5% of U.S. employment in the long run, the impact is likely to be transitory, with new jobs created to offset losses. This provides a plausible mechanism for the current labor market weakness: efficiency gains are reducing the need for certain roles even as the economy grows.

Yet, this narrative of displacement is countered by evidence of AI's potential to boost productivity and worker value. PwC's 2025 Global AI Jobs Barometer reveals that in industries most exposed to AI, revenue per worker is growing faster. The data shows a clear wage premium for workers with AI skills and faster skill adaptation in exposed jobs. This suggests a more nuanced outcome: AI is not just a job killer but a force that can make existing workers more productive and valuable. The net effect on employment will depend on whether these productivity gains and new job creation can outpace the displacement in the coming years.

Policy provides a crucial anchor for the outlook. The Federal Open Market Committee's median projection for 2026 is a unemployment rate averaging 4.4%. This forecast, released in December, assumes a path of monetary policy aimed at maximum employment and price stability. It implies that policymakers see the current softness as a temporary friction in the labor market's adjustment to new technologies, rather than a sign of a deepening structural crisis. The projected rate is only slightly below the December 2025 figure of 4.5%, suggesting a gradual normalization is expected.

The bottom line is a complex interplay. Growth is being powered by corporate profits, while the labor market is experiencing a temporary, technology-induced softening. The long-term resolution hinges on whether AI's productivity benefits can create enough new, high-value jobs to absorb displaced workers and support a healthy labor force. For now, the policy framework is set to guide this transition, but the market's focus remains on the speed and scale of that adjustment.

Financial and Policy Implications: The Fed's Tightrope

The structural divergence between growth and labor market weakness creates a delicate policy and financial landscape. For the Federal Reserve, the soft labor market provides a clear mandate to hold rates steady. With job creation in December falling well below expectations and the full-year average for 2025 at a mere 49,000 per month, the central bank has room to pause. Markets are pricing this in, with the next rate cut not anticipated until June 2026. This policy stance, combined with the tailwinds of tax cuts and easier financial conditions, is the foundation for Goldman Sachs' optimistic growth forecast.

That forecast sees U.S. GDP accelerating to 2.6% in 2026. The bank's analysis credits this outperformance to a confluence of factors: the fiscal stimulus from tax cuts, the reduced drag from tariffs, and the ongoing resilience in consumer spending. The recent holiday season, where online spending hit a record $257.8 billion, exemplifies this strength. In this scenario, corporate profitability-driven by pricing power and efficiency gains-continues to fuel investment and consumption, allowing the economy to grow even as the labor market stagnates.

Yet the key risk is that this model is not sustainable indefinitely. The primary driver of recent GDP growth is consumer spending, which is supported by a tight labor market and rising wages. If the current softness in hiring persists, it could eventually dampen household income growth and confidence. This would threaten the very engine of expansion that is currently powering the economy. The divergence creates a vulnerability: growth is being sustained by corporate profits and spending, but if prolonged labor market weakness erodes consumer demand, the entire trajectory could falter.

The bottom line for investors is a tightrope walk. The Fed's policy path is clear for now, supporting financial conditions. But the setup hinges on a fragile balance. The market is betting that corporate resilience and policy tailwinds can carry the economy through the labor market adjustment. The risk is that the adjustment proves longer and deeper than expected, turning today's structural divergence into a more pronounced economic slowdown.

Catalysts and Risks for 2026: What to Watch

The structural divergence of 2026 will be validated or challenged by a set of forward-looking events. The coming months will test whether the current model of growth powered by corporate profits can withstand a labor market that shows no sign of strengthening.

First, monitor the trajectory of the labor force. The participation rate fell to 62.4% in December, and forecasts suggest it may dip further to 62.3% by the end of the first quarter. This persistent decline is the structural bedrock of the labor market's weakness. Equally important is the trend in wages. While average hourly earnings grew at a 3.8% annual rate in December, accelerating from prior months, the key question is whether this pace can be sustained. A continued rise in earnings would signal tightening labor conditions, supporting consumer spending. A slowdown, however, would confirm deeper deterioration and raise the risk of a wage-price spiral.

Second, watch for revisions to the growth narrative. The GDPNow model's estimate for Q4 2025 has already jumped to 5.4%, up from 2.7% just days earlier. This sharp upward revision, if confirmed by the official release next month, would solidify the acceleration story. More critically, the preliminary 12.2% year-over-year increase in corporate profits for Q3 2025 must be followed by similar strength in Q4. Any deceleration in profit growth would undermine the financial foundation of the expansion, as it would signal a loss of pricing power or a rise in costs that could dampen investment and hiring.

The primary risk, however, is a sharp deceleration in consumer spending. This is the most vulnerable link in the current chain. The growth model assumes that corporate profits and spending can sustain the economy even as the labor market stagnates. But if the soft hiring persists, it could eventually dampen household income growth and confidence. The 50,000 jobs added in December was a modest gain, and the full-year average of 49,000 per month is the weakest in five years. If this trend deepens, it threatens to turn today's divergence into a more pronounced slowdown. The risk is that the engine of expansion, which is already heavily reliant on consumer spending, runs out of fuel.

The bottom line is one of fragile validation. The coming data will confirm whether the growth story is robust or merely a temporary anomaly. The labor market's trajectory and corporate profits are the twin pillars of this outlook. Any sign of weakness in either will force a reassessment of the entire 2026 setup.