In a recent analysis by Morgan Stanley, the outlook for the U.S. job market in 2026 suggests that widespread layoffs may be averted, contingent on a continued increase in consumer prices. According to the bank's chief U.S. economist, Michael T. Gapen, many companies had previously opted to limit hiring and reduce staff in early 2025 to avoid raising prices amidst rising tariff pressures. However, by the third quarter, this trend reversed, with firms beginning to increase prices again.
Morgan Stanley posits that if companies can maintain elevated prices, the likelihood of significant layoffs could diminish. Gapen highlighted that the pass-through of tariffs to consumer prices is nearing completion, and he does not anticipate new tariffs being introduced as the 2026 midterm elections approach. Inflation is expected to stabilize around 3% early in the year, driven by existing tariffs impacting the cost of consumer goods.
The analysis also indicates that companies are starting to recover income lost earlier in 2025 due to tariff impacts, which may support their ability to raise prices while retaining customers. However, there are concerns regarding consumer resistance to further price increases, especially amid economic uncertainty. Should companies face challenges in raising prices without losing market share, they may be compelled to cut labor costs, leading to potential layoffs.
In summary, while the job market is currently challenging, Morgan Stanley's findings suggest that the ability of companies to raise prices may play a critical role in determining employment stability moving into 2026.