Economic Outlook for Q1 2026
Quarterly Economics Briefing–Q1 2026
Posted Date: March 25, 2026
Key Themes and Takeaways
- Economic growth was resilient in 2025; the labor market was not.
- Hiring has slowed materially but still elevated wage growth has supported payroll growth for workers compensation premium.
- The breadth of the hiring slowdown, elevated wages, fewer low-tenured workers, and rising geopolitical uncertainty are four key trends that we will be watching for the economy and workers compensation in 2026.
One of These Things is Not Like the Other
If one had looked at the median forecast for real gross domestic product (GDP) growth from economists in early 2025 (2.2%) and then went into hibernation for a year, waking up only to see the final result, that individual may have thought that nothing eventful happened during the year. In reality, 2025 was anything but uneventful, marked by significant economic policy changes and the uncertainty that followed. Through everything that happened during the year, however, the economy remained resilient. Real GDP growth was close to early forecasts from economists: 2.0% growth from the fourth quarter of the previous year, a small deceleration from the 2.4% pace from the end of 2023 to the end of 2024.
While overall economic growth remained resilient, the labor market told a different story. The United States experienced the slowest pace of job growth outside of a recession since 2003, with a net employment gain of 116,000 jobs for the entire year. And job growth was a one-sector story. Health care and social assistance added 686,100 jobs over the course of the year, meaning that employment in all other industry groups combined declined by over 500,000 jobs for the year, with the sharpest declines seen in government employment.
But the lack of overall growth is not the only story of the labor market. In sharp juxtaposition to the slowdown in hiring, other labor market indicators continue to look strong. The unemployment and layoff rates remain historically low while wage growth remains elevated over pre-pandemic averages. In this brief, we will take a deeper dive into the labor market of 2025, assessing how these trends impact workers compensation and the outlook for the economy in 2026.
The Slowest Pace of Hiring Outside a Recession Since 2003
The economy added, on net, 116,000 jobs in 2025. For the period of 2015–2019, the economy averaged a gain of over 190,000 jobs per month. The sharp slowdown in hiring stands at odds with an economy that saw real GDP growth of 2.0% during the year and even further at odds with an unemployment rate that remained in the low 4% range for the entire year. While there are likely many factors that contributed to the hiring trends in 2025, from over-hiring in previous years coming out of the pandemic to new and emerging technologies, the predominant factor appears to be economic uncertainty.
The year started off slowly after robust job growth to end the previous year but quickly ramped up into the spring. Then, in April, there seemed to be a shift. The announcement of reciprocal tariffs in early April and the resulting uncertainty around input costs for businesses and affordability concerns for consumers may have led to pauses or delays in hiring plans for many areas of the economy. Monthly job growth oscillated between gains and losses for the next several months, culminating in a large loss of jobs in October during the government shutdown. As of February 2026, the overall number of employed workers is little changed from April 2025.
In 2025, job growth was heavily concentrated in one industry group: health care and social assistance. Leisure and hospitality services and other services also saw small gains in employment, offset by declining employment in manufacturing, trade, transportation, information services, and professional services. Other industry groups experienced little employment change during the year.
The breadth of employment changes is the first key trend that we will be watching in 2026. Health care is a long-standing source of employment growth. As the overhang of economic uncertainty persists, what happens to employment outside of health care and social assistance will be more telling as to the overall direction of the labor market.
The Hiring Slowdown, Payroll, and Workers Compensation Premium
Based on the information in the previous section, it may be easy to assume that the slowdown in employment growth in 2025 would have an outsized impact on premium for workers compensation. But payroll, the basis for workers compensation premium, is made up of two parts: employment and wages. As shown in the previous section, employment change contributed very little to payroll growth. However, wage growth remained elevated, even in industry groups that saw declining employment, such as manufacturing or transportation and warehousing. With continued wage growth, payroll growth softened from prior years but was close to its pre-pandemic average despite little employment change.
This is the second key trend that we will be watching in 2026. Given the slowdown that we’ve seen in hiring, it is actually quite surprising that wage growth has remained as robust as it has. Should overall employment gains remain relatively flat, wage growth is likely to experience more downward pressure as companies have less competition to attract and retain talent. However, should employment growth begin to rebound, we may see wage growth remain elevated as companies look to keep their best talent.
The Hiring Slowdown, Turnover, and Workers Compensation Frequency
From the perspective of the economy, the sharp slowdowns in hiring and employment growth are unwelcome trends and raise many concerns around the state of the economy overall. From the worker’s compensation perspective, however, there are some potential positives from these trends. While most of the focus has been on the slowdown in employment growth, the more important trend has been the slowdown in hiring, which has been coupled with low rates of voluntary quits as well as layoffs and discharges. This slowdown in turnover has reduced the number of employees with fewer than 12-months of tenure. Workers in their first year on the job are about twice as likely to have a lost-time claim than other workers and account for roughly 40% of lost-time claims.1
1 A 2022 NCCI report estimated that short-tenured workers in most sectors are close to twice as likely to suffer work injuries than full-tenured workers. Recent estimates from the US Bureau of Labor Statistics Survey of Occupational Injuries and Illnesses, from private insurers’ statistics and from NCCI’s own Indemnity Data Call suggest that workers with less than one year of tenure account for 35–43% of work injuries or workers compensation claims.
In 2025, the labor market saw an average of around 5.3 million workers hired each month. By comparison in 2022, at the height of the “Great Reshuffle,” the labor market saw an average of around 6.4 million workers hired per month. We therefore can see that 2022 saw an additional 14 million people hired over the course of the year compared to 2025. Said a different way, businesses in 2025 were employing 14 million fewer new workers with less than 12-months of tenure on the job than they did in 2022. Hiring rates, and their associated impact on worker tenure, is the third key theme that we will be watching in 2026.
What makes this key theme even more interesting is the interplay with the second theme, wage growth. One often used mechanism for workers to increase their wages is to take a new, higher-paying job, or to be able to credibly threaten to do so. In theory, a slowdown in labor demand (hiring) and fewer workers leaving their jobs (separations) should signal that there is less competition to both attract and retain workers, putting downward pressure on wage growth. While we have seen wage growth soften some from the elevated levels following the pandemic, wage growth remains above pre-pandemic rates and higher than one might expect given the low-growth, low-turnover environment of the past year.
An Additional Source of Economic Uncertainty
World affairs have added a new, fourth key theme to watch for the economy and labor market in 2026. Geopolitical tensions in the Middle East have risen sharply. Among other effects, this has increased prices for numerous commodities, including oil and gas.
Should this rise in tensions be short-lived, we may see only a minor or temporary impact on the trajectory of economic growth and hiring in the labor market. However, a prolonged period of elevated tensions, combined with a prolonged increase in commodity prices, may give hiring managers continued reason to pause or forgo expansion plans. Rising non-labor input costs may lead some companies to respond with reductions in labor costs, leading to an extension or worsening of the current hiring slump. This new layer of economic uncertainty may lead to further questions about the health of the consumer and the durability of the economy of 2025.
Conclusion
While the economy was resilient in 2025, the labor market was less so. Slow hiring meant that employment grew at its slowest pace, outside of a recession, in decades. Firm wage growth partially offset softening employment gains to help support payroll growth for workers compensation premium. The slowdown in hiring and turnover, while negative for the economy, may positively impact frequency trends in workers compensation due to fewer low-tenured workers. The recent rise in geopolitical tensions and subsequent rise in commodity prices has dampened some enthusiasm for short-term improvement in the labor market.
These are the four key themes we will watch for workers compensation in 2026: 1) broad-based employment growth or its continued lack thereof; 2) elevated wage growth or a decline given slowing employment and turnover; 3) hiring rates and potential tenure effects on frequency; and 4) potential geopolitical risks to what has been resilient economic growth.