The slow hire, slow fire economy remained intact in August as the demand for new workers continued to sag, resulting in the creation of 22,000 jobs.
When that August data is combined with a downward revision of 21,000 jobs in June and July, the result is that total employment increased by only 1,000 jobs over the past three months compared to what was originally estimated.
Deterioration in the domestic labor market is a function of cyclical factors such as trade and immigration policies as well as structural factors like the retirement of baby boomers, all of which are constraining the labor supply.
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We expect a series of weak jobs reports throughout the remainder of the year that should hover near the 50,000 breakeven level necessary to keep employment conditions stable. Worse still, June’s data was revised down to show a decline of 13,000 net jobs, the first net loss since December 2020.
With hiring slowing to an average of 29,000 over the past three months, conditions are ripe for a bit of risk management by the Federal Reserve, which is poised to reduce its policy rate by 25 basis points on Sept. 17.
The impact of tariffs on hiring is undeniable—not only in August’s numbers but throughout the May-August period, when tariffs pushed economic uncertainty to the highest level in years.
Not surprisingly, the goods sector has been hit hardest by tariffs, posting four straight months of declines. Manufacturing, which was supposed to benefit from restrictive trade policies, instead slipped into reverse as supply chain uncertainty deepened.
Meanwhile, the unemployment rate ticked up to 4.3%, with the number of unemployed workers reaching the highest level since 2021.
Policy implications
If the Fed had this data back in June, the likelihood of a rate cut in July would have risen significantly. The August report should all but seal the deal for a September cut—unless next week’s consumer price index delivers a major upside surprise.
The Fed needs to be certain that its credibility remains intact to look through what will be a season of inflation in the near term and cut rates.
One will hear talk of a 50 basis-point cut, which we think is premature. It would take a large downside surprise in the producer price index and consumer price index for that to happen. And based on our forecast, that is unlikely.
We expect inflation to edge higher in August, but the increase will most likely not be strong enough to offset the weak labor market data. September’s cut will be less about stimulating growth and more about managing risks.
Beyond September, though, the Fed’s challenge becomes far more complex if job gains remain tepid while inflation stays elevated or increases. That dynamic would make a sustained series of cuts far from guaranteed.
A recession?
While job growth typically goes negative when the economy is heading into a recession, we think that is not what is happening.
Current labor market dynamics are a function of both cyclical and structural factors, with trade and immigration policies at the center of these factors.
Pervasive uncertainty driven by these trade and immigration policies is the primary impetus behind reduced demand for workers. At the same time, supply-side factors driven by restrictive immigration policies and demographic changes will continue to constrain the ability of firms to find workers.
We expect growth and hiring to reaccelerate as the combination of interest rate cuts, tax cuts and full expensing of business investment bolster demand for labor this year and next. We do not expect the economy to slip into recession.
The data
Goods sector employment fell by 25,000 in August, with all subcomponents showing declines. Manufacturing jobs fell by 12,000, while mining and construction dropped by 6,000 and 7,000, respectively.
Trade and transport added 2,000 jobs while retail trade added 11,000. The information sector shed 5,000 jobs, the financial sector lost 3,000, and professional and business services lost 7,000.
The services sector continued to be a bright spot, rising by 63,000 jobs in August. Most of the increase came from the two subsectors: education and health services, and leisure and hospitality, which increased by 46,000 and 28,000 positions, respectively.
Government jobs declined in August, falling by 16,000, driven by federal and state government.
Average hourly earnings increased by 0.3% on the months and by 3.7% from a year ago. Total private hours worked remained unchanged at 34.2 a week while aggregate hours worked also remained static at 116.7.
The labor force participation rate increased to 62.3% while the employment-to-population ratio also increased to 59.6%.
The takeaway
Demand for labor is slowing, and supply factors are going to be a structural impediment to clear policy decisions out of the Fed given rising inflation.
The economy will slow through the end of the year before a likely reacceleration in growth and hiring on the back of lower interest rates, tax cuts and full expense for business investment.
Recession odds have not increased, and we do not expect one in the near term. But the labor market is losing momentum. The Fed will need to respond with a September rate cut to mitigate growing risks from a weakening jobs picture.
The challenge is that inflation pressures are also firming as tariffs filter through the economy. The central bank is walking a tightrope—its job is getting harder, not easier.