Executive summary
U.S. payrolls increased by a lackluster 22,000 in August, below consensus expectations for 75,000. That was coupled with downward revisions that clipped 21,000 jobs from the previous two months’ tallies, including flipping June to -13,000. The revisions pulled the six-month average under 65,000.
Most of the underlying components deteriorated; most notably, an uptick in the unemployment rate to 4.3% and more than half of the major industry groups lost jobs in August. The exceptions were hours worked and wages, which remained steady.
In our view, the weakening labor market trend cements a quarter-point (0.25%) rate cut by the Federal Reserve (Fed) at the September 17th meeting. While the weaker trend is spurring talk of larger or more Fed rate cuts, we still expect the Fed to move cautiously to ensure that recent tariff-related distortions in economic data are temporary and that inflationary pressures aren’t mounting
What happened
Payroll trends – 6 month trend down sharply (again)
Prior month revisions modestly increased July to 79,000 from 73,000 but knocked June into negative territory. That dragged the six-month average under 65,000.
Private payrolls increased by 38,000, putting total U.S. nonfarm payrolls at 159.5 million, edging the all-time high upward. Service-providing industries hired 63,000 workers in August, but goods producers shed 25,000 workers.
Government payrolls lost 16,000 workers in August as two of the three segments cut positions. The local level hired 12,000 – most of which were educational – but states sliced 13,000 positions. Federal payrolls decreased by 15,000 last month, which is largely due to the Department of Government Efficiency (DOGE) initiative. Thus far, DOGE has reduced federal payrolls by 97,000, which is roughly half of the 200,000 DOGE-related cuts we anticipate in 2025. Zooming out – DOGE-related federal job losses are minor compared to the nearly 160 million U.S. nonfarm jobs.
A review of the major industry trends
Seven of the 11 major industry groups reduced payrolls in August, the most since the pandemic shutdown.
Health care, within the education/health services industry group, retained its crown as the largest jobs creator, adding 47,000 during the month, while private education services shed 1,000 positions in August.
Leisure and hospitality payrolls increased 28,000, which were evenly split between arts & entertainment and restaurants and bars. Still, the increases were weaker than expected for the summer season.
Retailers added 10,500 jobs during the month, general merchandisers hired in back-to-back months for the first time in seven months, or 18,000 combined in July and August.
The professional & business services segment lost 17,000 workers during the month, just over half were within temporary help services, which cut 9,800 workers. That extends an ugly streak of losing jobs in 38 out of the past 41 months, down 677,100 jobs over that span for temp help.
Unemployment rate rose again but the monthly pace of wages and hours worked held steady
The unemployment rate rose by 0.1% to 4.3%. That’s the highest level since October 2021 and above the pre-pandemic 3-year average of 4.0%; however, it remains low compared to the historical average of 5.7% since 1948 and is flat from a year ago.
The broader underemployment rate (U-6) increased by 0.2% to 8.1%, which is above the pre-pandemic 3-year average of 7.8%. The labor force participation rate rose to 62.3%, which is 1.0% below the pre-pandemic rate of 63.3%.
Average weekly hours worked remained at 34.2, just below the pre-pandemic average of 34.4. Within manufacturing, hours worked fell by 0.1 to 40.0, while overtime hours held steady at 2.9 for the seventh consecutive month.
Average hourly earnings increased by 0.3% month over month, steady for a second month in a row and matching the pre-pandemic three-year average. For rank & file workers—officially known as production & nonsupervisory employees—wages rose 0.4% in August, which is just above its pre-pandemic average of 0.3%. Annual wage growth was 3.7% for all workers and 3.9% for rank & file workers, compared to a pre-pandemic average of 3.0% for both.
Our take
There’s no sugar-coating the weakness in labor markets currently. While there have only been limited signs of pricing pressures thus far, the lackluster labor market is concrete evidence of the impact of tariffs, which are causing widespread distortions, such as huge swings in freight volumes as consumers and businesses attempt to sidestep tariffs.
Conversely, the job losses have been rather muted. That’s understandable given the uncertainty businesses have endured, particularly during early spring and summer months in the aftermath of Liberation Day tariff announcements, complicating personnel decisions. To wit, many businesses seemed to view the tariff uncertainty as a temporary phenomenon, albeit a very big one. Accordingly, many decisionmakers were in “no hire/no fire” mode.
We’re hopeful that perhaps the modest reacceleration in job growth – averaging about 50,000 per month in July and August from practically no growth during May and June – will endure. Our hope is based on the tangible differences between the May/June and July/August periods; most prominently, the passage of the One Big Beautiful Bill Act (OBBBA) in early July and additional clarity on tariffs, including deals with the European Union and Japan, and extensions for China.
More importantly, while the actual tariffs collected have increased dramatically, the amount of goods getting tariffed remains relatively limited. In fact, less than half of all U.S. imports are currently subject to tariffs.
The best example of this is Canada. Early in the year tariffs on Canadian goods were announced at 25%, though energy products would have a 10% tariff, and both were effective February 4, 2025. On August 1st, the tariff rate jumped to 35%. Yet, recent trade data shows that approximately 90% of Canadian goods are now considered compliant with the United States-Mexico-Canada Agreement (USMCA), meaning they are duty-free or subject to minimal tariffs – up from about 50% in May. Thus, the effective tariff rate on Canadian goods is 2.4% (through the latest available trade data).
Which brings us to “what does this mean for the Federal Reserve?” Fed speakers – both doves and inflation hawks – have universally stated that monetary policy is restrictive. Thus, we believe the weakening labor market trend cements a quarter-point (0.25%) rate cut by the Federal Reserve (Fed) at the September 17th meeting.
However, the factors needed to forecast the Fed’s actions much beyond the September meeting remain unclear, particularly considering the many tariff-related distortions in economic data. While the weaker jobs trend is spurring talk of larger or more Fed rate cuts this year, we still expect the Fed to move cautiously to ensure that recent weakness is temporary and inflationary pressures aren’t mounting.
If both the labor market weakness and inflation prove temporary, then we could see the Fed continuing to lower rates, perhaps even a quarter-point rate cut at each of the remaining three meetings this year. Or more weakness could spell a half-point cut (0.50%) at one of those meetings. Yet there’s a lot of data between now and those meetings, including several more jobs reports and inflation readings, which will be critical in determining the speed and size of potential rate cuts.
Bottom line
The U.S. economy remains in a muddle-through environment. We’re hopeful that the modest reacceleration in job growth during the past two months will persist, supported by certainty in tax policy and further clarity on the tariffs. But we expect that the Fed will likely proceed cautiously until there’s more evidence, which means a quarter-point rate cut at the September 17th meeting.
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