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The labor market has weakened significantly: Only 22,000 jobs were added in August, and job creation has averaged just 27,000 over the past four months. In addition, there was a low initial response rate to the August survey. As further data come in, the August number is likely to be revised down. Finally, the unemployment rate has ticked up in each of the past two months, though modestly so far.
Most sectors showed job losses, including mining, manufacturing, construction, wholesale, insurance, temporary help, and federal and state government. Health care, social assistance, and leisure and hospitality showed gains. Consumer spending also helped retail and e-commerce jobs to grow. The loss in state government jobs shows that federal spending cuts are starting to have an effect downstream.
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Overall, the picture is of a weak labor market, with few sectors adding jobs outside of health care and social assistance. Even though the rise in the unemployment rate was small, edging up from 4.2% to 4.3%, the length of time workers are staying unemployed on average increased, and the number who were forced to work part-time because of poor economic conditions rose.
Wage growth ticked down to a 3.7% annual pace, and is expected to slow to 3.5% by the end of the year. Wage growth tends to lag other labor market indicators.
Consumer and business uncertainty about the economy will continue to delay hiring plans and should slow future pay gains. Hiring is often deferred when consumers are concerned about losing their jobs, or when businesses don’t know if there will be a positive return to investing in additional workers. Prior to the tariffs, we expected monthly job growth of about 150,000 new positions to continue. Now, that could disappear almost entirely, if enough employers decide to hold off on hiring while they sort out the effects of the new tariffs on both their businesses and on the economy as a whole.
The signs of a slowdown in the labor market make it certain that the Federal Reserve will cut interest rates at its policy meeting on September 17. The Fed is also likely to cut at its meetings on October 29 and/or December 17. It would have liked to wait longer to see what the impact of tariffs will be on inflation, but the weakening economy will take precedence over fighting inflation. The most immediate question now is whether the Fed could opt for a larger, half-point cut to its benchmark interest rate in September, or stick to the quarter-point cut that most forecasters are betting on.
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