Freight distortions continue, while Fed rate cut likely coming in September

Trend watch

Air passenger traffic has followed the typical seasonal pattern fairly closely, dropping below 17 million this past week. It should stabilize in the next week or so and hold steady through mid-October, then start tapering lower until mid-November – right before the big Thanksgiving rush.

Meanwhile, we updated the scheduled freight bookings from China to the United States. With bookings continuing to drift lower, this suggests that freight volumes for August and September are likely to be softer than the strength witnessed in July. Furthermore, the lower incoming freight volumes will ripple through the port, rail, trucking and freight data in coming weeks, which we attribute to tariff-related distortions.

Our take

While we publish a separate report discussing the monthly jobs report, we’ve included a couple of supplementary jobs charts here. One highlights the slowing trend in hiring, while the second shows the progress of the Department of Government Efficiency (DOGE) initiative.

While the August jobs report was decidedly weak, the segment-level job losses were 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.

Additionally, the tone of the incoming data remained mixed, although some of the softness within the high-frequency travel statistics is related to the seasonality mentioned earlier.

Which brings us to “what does this mean for the Federal Reserve (Fed)?” 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 Fed at the September 17th meeting.

Looking out further, 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.

Lastly, the annual benchmark revisions for payrolls will be released this coming week. It will likely get extra scrutiny by markets to discern if the payroll weakness seen in May and June were isolated and temporary.

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.