The job market is brutal right now, and there’s growing concern that 2026 could see more layoffs. However, Morgan Stanley says that many companies may be able to avoid having to slash head count.
The bank’s chief US economist, Michael T. Gapen, and his team wrote on Tuesday that the US economy may be able to avoid widespread layoffs in 2026 but only if companies continue hiking prices, after already raising them throughout 2025.
The cost of avoiding layoffs
Rising layoffs and sticky inflation were two of the big macro themes that defined 2025. According to Gapen and his team, companies opted to decrease hiring and reduce staffing to avoid raising prices earlier in the year as tariff pressures kicked in.
By the third quarter, though, the tides had shifted, and companies across industries were raising prices again, citing tariffs as the primary catalyst.
Now, Morgan Stanley says that this may be the key to avoiding widespread layoffs in the coming year.
“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,” Gapen said. “On net, our outlook assumes inflation firms, profitability is largely restored, and the economy avoids layoffs.”
The economist added that his team doesn’t expect the Trump administration to implement new tariffs as the 2026 midterm elections approach. Yet, the analysts also emphasize that they don’t think companies are done raising prices.
The bank maintains its baseline view that the existing tariffs will push core inflation to 3% early in 2026, with signs already being seen in the cost of consumer goods.
“Monthly rates of consumer price inflation in June through September have come with observable increases in components of CPI and PCE that have high direct exposure to tariffs,” Gapen wrote.
Morgan Stanley’s analysis also found that companies have started to recoup some of the money they lost in early 2025 after being impacted by tariffs. That’s a promising development, particularly as the bank predicts that many firms can raise prices while still maintaining the bulk of their customer base.
However, the thesis that higher prices can help prevent layoffs in 2026 only applies so long as customers continue to stomach higher costs.
Consumers have a limit to how much more they’ll pay for goods, particularly as economic uncertainty remains high. It is unclear just how high prices can go before shoppers balk.
“If firms found they could not push output prices higher on account of consumer resistance and loss of market share, then we think they would turn to reducing labor costs further, triggering layoffs,” Morgan Stanley added.
