As the American job market grapples with increasing difficulties, apprehensions about intensified layoffs in 2026 are mounting. Yet, a new perspective from Morgan Stanley's chief US economist Michael T. Gapen and his colleagues offers a cautiously optimistic outlook, pointing to tariff-driven inflation as a potential buffer against mass employment reductions.
In their report issued on Tuesday, the Morgan Stanley team analyses recent price and labor dynamics, indicating that companies might avoid large-scale layoffs next year if they continue to raise prices — a practice they have already increasingly adopted throughout 2025. This approach contrasts with earlier in the year, when businesses sought to limit price hikes to shield consumers but instead responded to rising tariffs by slowing hiring and trimming staff.
Gapen and his team highlight that the year 2025 was shaped by two dominant macroeconomic forces: persistent inflation and escalating layoffs. Initially, facing pressure from newly imposed tariffs, companies attempted to manage profit margins without passing costs onto consumers by shrinking their workforce and curbing new hires.
However, by the third quarter of 2025, a marked shift occurred. Across various sectors, businesses resumed increasing prices, directly linking these hikes to tariff-induced cost escalations. This strategic pivot is considered by Morgan Stanley experts as a potential key mechanism for preserving employment levels in the coming year.
Gapen explains, "We think the majority of the tariff pass-through to final consumer prices will have been completed at that point, assuming the administration does not push tariff policy further." He elaborates that their forecast assumes a scenario where inflation stabilizes, business profitability recovers largely, and the economy sidesteps widespread layoffs.
While the possibility of new tariffs remains uncertain, the economist points out that with the 2026 midterm elections approaching, the Trump administration is unlikely to initiate additional tariff measures. Even so, the team advises that the trend of ongoing price increases is expected to persist as firms continue to adjust to the elevated cost landscape.
Morgan Stanley sustains its foundational view that the standing tariff regime will drive core inflation to approximately 3 percent in early 2026. Indicators presented by rising prices in consumer goods during mid-2025 underscore this trend. Specifically, data from June through September reveal increased rates of consumer price inflation in components of the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) that directly reflect tariff exposure, according to Gapen's observations.
The analysis also uncovers a positive development: after experiencing initial financial setbacks earlier in 2025 due to tariffs, many companies have begun recapturing lost revenue. This gradual recovery in profitability is particularly encouraging as it suggests firms can implement price increases without severely compromising their customer base.
Nevertheless, the premise that inflation-driven price increases can avert employment reductions depends heavily on consumer tolerance for higher expenses. The bank clarifies that customers have a finite capacity to absorb cost increments, especially in the face of ongoing economic uncertainty. The critical question remains unresolved: how much further can prices rise before consumer resistance results in decreased demand?
Morgan Stanley emphasizes this caveat, noting that if firms encounter consumer pushback that limits their ability to elevate output prices without sacrificing market share, they might resort to cutting labor costs further. Such an outcome would likely revive the trend of layoffs the industry seeks to avoid.
In summary, while tariff-driven inflation presents a dual-edged scenario—exerting cost pressure yet potentially stabilizing employment—the interplay between company pricing strategies and consumer response will be decisive in shaping the US job market's trajectory in 2026.