US Job Growth Concerns: Will the Fed Cut Rates?

US Job Growth Concerns: Will a Weak Report Trigger a Fed Rate Cut?

If forecasts of lackluster U.S. job growth in August and a rise in the unemployment rate to 4.3% prove accurate, it will confirm labor market weakness and potentially give the Federal Reserve the green light for a rate cut this month. The closely watched jobs report, to be released by the Labor Department on Friday, comes after news this week that the number of unemployed persons in July surpassed the number of job openings for the first time since the COVID-19 pandemic.

For now, U.S. job growth appears to have entered a 'stall' state, which economists attribute to President Trump’s sweeping import tariffs and immigration crackdowns that have reduced the labor pool. The weakness in the labor market is primarily coming from the hiring side.

Trump’s levies have pushed the average U.S. tariff rate to its highest level since 1934, which had sparked market concerns about inflation and prompted the Fed to pause its rate-hiking cycle. Just as some uncertainty about trade policy was beginning to dissipate with most tariffs now in place, a U.S. appeals court ruled that most of the Trump administration’s tariffs were illegal, leaving businesses in a state of flux.

Ron Hetrick, a senior labor economist at Lightcast said, “Uncertainty is the killer of the labor market, and we have a lot of companies that have paused (hiring) because of tariffs, paused because of uncertain Fed actions.”

Economists expect the economy to have added 75,000 nonfarm payrolls last month, following a gain of 73,000 in July. Those levels of job growth are more realistic given the reduced labor supply, economists said. Economists’ estimates range from no new jobs to 144,000 created.

Revisions to the June and July job numbers will be closely watched. Earlier, the May and June jobs data were sharply revised down by a combined 258,000, which enraged Trump last month. Trump used this to fire the Bureau of Labor Statistics director, Erika McEntarfer, accusing her of falsifying jobs data.

Economists defended McEntarfer and attributed the revisions to the “business birth-death” model, which is the BLS’s method for estimating the number of jobs added or lost in a month due to companies opening or closing.

“We’re in a low-churn labor market where there’s not a ton of hiring or firing going on. So that means the job growth we’re seeing in the economy is primarily driven by the net birth of new firms, but that is precisely the most imputed part of the data. It’s most sensitive to revision because it’s the result of explicit modeling by the BLS, rather than something they can survey,” said Ernie Tedeschi, economic director at Yale’s budget lab.

In the second quarter, the U.S. added an average of 35,000 jobs per month, compared to 123,000 in the same period in 2024.

Another 800,000 Downward Revision?

The sluggish job growth will likely be confirmed when the BLS publishes its preliminary revision estimate for employment levels for the 12 months through March next Tuesday. Based on available Quarterly Census of Employment and Wages (QCEW) data, economists estimate that employment levels could be revised down by as much as 800,000. The QCEW data is taken from reports employers submit to state unemployment insurance plans.

Trump has nominated E.J. Antoni, a chief economist at the conservative think tank Heritage Foundation, to head the BLS. Antoni has written opinion pieces critical of the bureau, even suggesting suspending the release of monthly jobs reports, and is seen as unqualified by economists across the political spectrum.

“Trust in these numbers will depend on whether this commissioner is seen as non-partisan and somebody who values the BLS’s independence and wants to put out the absolute truth, rather than responding to political pressure,” Tedeschi said.

In the second quarter, the U.S. shrank its labor force by 800,000, which is attributed to immigration raids and the termination of temporary legal status for hundreds of thousands of immigrants. The shrinking labor pool has not only depressed job growth but also prevented a sharp rise in the unemployment rate. The unemployment rate is expected to have edged up from 4.2% in July.

Economists estimate that the economy needs to create between 50,000 and 75,000 jobs per month to keep pace with the growth of the working-age population.

Federal Reserve Chairman Jerome Powell last month hinted that the Fed could cut interest rates in September, acknowledging that risks were rising in the labor market but also adding that inflation remained a threat. The Fed has held its benchmark overnight lending rate in a range of 4.25%-4.50% since last December.

New jobs are likely to remain concentrated in the healthcare and social assistance industries. But warning signs are flashing, with government data on Wednesday showing that job openings in that sector fell for a second straight month in July.

A strike by 3,200 Boeing workers could weaken manufacturing employment numbers, a sector already under pressure from tariffs. Federal government jobs are expected to decline further in the context of spending cuts by the White House.

“We’re seeing more evidence that labor demand weakened further in August, and the market and Fed officials are underestimating the risk of layoffs this year,” said Veronica Clark, an economist at Citigroup.