For months\u2014perhaps even years now\u2014the labor market has trucked along and allowed the Federal Reserve headspace to contend with its favorite problem child: inflation.<\/p>\n
But more recently, data in the labor sector has weakened. So much so that the Federal Open Market Committee (FOMC) could be forced back to weighing both sides of its mandate (maximum employment and inflation at 2%) equally. To stabilize the former might require them to cut rates.<\/p>\n
Today\u2019s jobs report has done little to inspire confidence. The Bureau of Labor Statistics reported that in August nonfarm payroll employment\u00a0added a subdued 22,000 roles, with the unemployment rate holding steady at 4.3%. New jobs came from the health care sector, but were offset by losses in the federal government as well as in mining, quarrying, and oil and gas extraction.<\/p>\n
Economists will be interested in the demographics contributing to unemployment, with the number of long-term unemployed staying relatively unchanged at 1.9 million last month. That being said, this cohort now accounts for more than 25% of unemployment. Conversely, green shoots can be seen from new entrants (those searching for a job for the first time); their numbers decreased by 199,000 last month\u2014largely offsetting a drop the month prior.<\/p>\n
Further signs of sickness can be seen in job openings. This week\u2019s Job Openings and Labor Turnover Survey (JOLTS) came in below analysts\u2019 expectations, with available positions\u00a0down to 7.18 million from a 7.36 million reading in June. A key driver in the downturn was in health care, which had provided a boost to openings in recent reports. Elsewhere retail trade, leisure, and hospitality also posted downturns in openings.<\/p>\n
A gamut of issues could be contributing to the graying picture, with economists speculating it could be anything from AI job displacement to slower hiring because of Trump 2.0\u2019s policies, or because of fundamental shifts in supply.<\/p>\n
Depending where you land in the debate, it might also help answer the question of why the BLS was forced to make such significant revisions to its data for earlier this year. Last month the Labor Department reported payrolls grew by just 73,000 in July, well below forecasts for about 100,000. It also revised down estimates for May and June, by a cut of 258,000, putting the gain over those three months at 35,000.<\/p>\n
The counterweight to the labor market\u2019s apparent downward trajectory is the fact that unemployment hasn\u2019t spiked\u2014despite the weak payroll and openings data. In July the BLS reported<\/a> that despite the minor payroll gains, America\u2019s unemployment rate stayed around the 4.2% mark\u2014suggesting labor supply is shrinking almost equally with demand.<\/p>\n It\u2019s for this reason that recession indicators aren\u2019t yet flashing red. The Sahm Rule<\/a> (which has largely been accurate in predicting a recession based on the unemployment rate\u2019s three-month moving average) in July sat at a healthy 0.10 percentage points\u2014well off the 0.50 benchmark, which would indicate an incoming economic regression.<\/p>\n If the early signals of labor market weakness prove persistent, all of that could change. What economists\u2014and the Fed\u2014really need to know, is the causation.<\/p>\n A question of confidence<\/p>\n A major factor shaping the employment market is uncertainty, namely how much decision-makers batten down the hatches against Trump-induced headwinds. <\/p>\n With questions over tariffs and immigration still hanging over the outlook, it\u2019s perhaps no surprise that when the Conference Board released its\u00a0U.S. CEO Confidence report<\/a>\u00a0for the third quarter, it confirmed 34% of CEOs\u00a0expected a net reduction in their workforce<\/a>\u00a0over the next 12 months.<\/p>\n Immigration and confidence are two major considerations for David Doyle, Macquarie\u2019s head of economics. He describes the current market as \u201clow turnover,\u201d with few layoffs but limited hiring, too\u2014hinted at by spiking numbers in unemployment owing to new joiners to the labor force. <\/p>\n That lack of hiring is the result of uncertainty, Doyle told Fortune: \u201cWhen there\u2019s elevated uncertainty, one of the easiest things to do is to delay new hiring decisions. Maybe when [decision-makers] have more clarity on the outlook for their companies and the future earnings growth, that could pave the way for \u2026 the handcuffs to come off.\u201d<\/p>\n There\u2019s also been a \u201csignificant\u201d shift in immigration policy, Doyle added, which is keeping the unemployment rate stable as lower hiring is met with a shrinking labor supply. However that near equilibrium can only be maintained to a point, he added: If confidence or any positive fiscal stimulus arrives courtesy of the One Big Beautiful Bill Act, then firms may find themselves trying to hire without anyone to fill the positions\u2014an outcome which may materialize early in 2026. <\/p>\n With the margins so small in either direction\u2014just 73,000 jobs created last month\u2014that leaves little room for error, Doyle added: \u201cWe\u2019re in this equilibrium, but if the layoffs pick up even a little bit you could see that throw the equilibrium off, and unemployment starts to rise. The flip side of that is once we get beyond that near-term softness, near-term weakness, it\u2019s possible things go the other way and unemployment can fall.\u201d<\/p>\n The AI displacement issue<\/p>\n Another question is whether, at long last, the much warned-about wave of AI job losses is finally here. According to a St. Louis Fed FRED (Federal Reserve Economic Data) study<\/a> published last week: \u201cUnlike previous technological revolutions that primarily affected manufacturing or routine clerical work, generative AI can target cognitive tasks performed by knowledge workers\u2014traditionally among the most secure employment categories.\u201d<\/p>\n According to the study, industries involving computer and math roles (where AI was adopted more widely) are among the sectors seeing the highest levels of unemployment\u2014though how much of this is the result of displacement, or a rebalance following COVID-era hiring, is up for debate.<\/p>\n It\u2019s hard to place the ultimate impact of AI on the spectrum of short-term blip to long-term upheaval. After all, for every Goldman Sachs report<\/a> warning of 300 million jobs lost or displaced, there\u2019s a World Economic Forum\u00a0study<\/a> saying that by 2030 AI will create 170 million new roles.<\/p>\n