August employment: Help not wanted

Summary

The August employment report was underwhelming and capped a summer of labor market doldrums. Nonfarm payrolls grew by just 22K in August, and some modest downward revisions to job growth in July and June pushed the three-month moving average on payroll growth down to a measly 29K. The hiring that did occur was very narrowly concentrated. The health care, social assistance, leisure and hospitality sectors added 75K jobs in August. Excluding these sectors, employment fell by 53K last month. In the household survey, the unemployment ticked up a tenth to 4.3%, the highest reading since October 2021.

Today's data, in conjunction with other labor market data received in recent months, suggest the labor market has hit stall speed. The weak pace of hiring and gradual uptick in the unemployment rate creates risks to the Fed's full employment mandate at the same time that inflation is creeping higher due to historically high tariffs. Faced with such a dilemma, we believe the FOMC will put more weight on rescuing the labor market and hope that tariff-induced inflation will fade in 2026. We look for a 25 bps rate cut at the upcoming FOMC meeting on September 17-18 followed by two more 25 bps rate cuts at the final two FOMC meetings of the year. We think the risks are skewed toward one or two more rate cuts at the first few FOMC meetings of 2026 as the Committee moves its policy rate toward a more neutral setting.

Weakness from all sides

The jobs engine that has been integral to U.S. economic growth defying expectations for the past four years is stalling. Nonfarm payrolls rose just 22K in August, coming in below consensus expectations for a 75K gain. The pattern of previous months' gains being revised lower also continued, with a two-month net revision of -21K that included a revision that pushed employment growth in June into negative territory (-13K). With the response rate to this month's print the lowest for any August dating back to 2000s, the prospect for meaningful revisions the next two months is large. But even with elevated risk of further downward revisions, the recent pace of hiring is dangerously close to crossing into negative territory, where job market weakness quickly becomes self-reinforcing. Over the past three months, payrolls growth has averaged just 29K.

Weakness remains widespread across industries, making it difficult to drive a bounce-back in the near term. Government employment declined by 16K in August, as a 12K increase in local government jobs was not enough to offset further declines in federal employment amid the ongoing hiring freeze and a drop in employment at the state level. The tumult of trade policy is more clearly beginning to weigh on goods-related industries, with employment in manufacturing and wholesale trade each declining by 12K last month. "White collar" professional jobs have not been spared. Employment in information, finance and professional & business services all fell over the month. Once again, the entirety of net hiring could be chalked up to health care & social assistance, but even there, hiring is losing steam, with August's 47K rise the industry's smallest increase in three and a half years. While leisure & hospitality provided a lift this past month, the majority of industries continue to cut jobs. The diffusion index of industries adding jobs was below 50 for a fifth consecutive month, an unprecedented stretch outside of recessions and recoveries.

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