Introduction to the Labor Market
The recent jobs report has shown that the labor market is softening and is on the edge of a potential downturn. This is evident from the worse-than-expected job growth, which saw an increase of only 22,000 nonfarm jobs, below expectations. The previous data was revised slightly lower, and the household survey data showed a gain of 288,000 jobs, following a decline of 260,000 jobs the previous month.
Job Growth and Unemployment Rate
The unemployment rate ticked up to 4.3% from 4.2%, mainly due to positive reasons such as job gains and an increase in the labor force. The underemployment rate, which includes people who are unemployed, marginally attached to the workforce, and employed part-time for economic reasons, is 1.5 percentage points above its December 2022 low. This serves as a leading indicator of unemployment, reflecting the growing slack in the labor market.
Wage Growth and Labor Market Indicators
Wage growth was below expectations at 3.7% year-over-year, down from 3.9% last month. The average workweek hours held steady at 34.2, just above the five-year low of 34.1 in January. The employment-to-population ratio among prime-age individuals has been teetering around its current level but has remained resilient. Initial weekly filings for unemployment benefits remain benign, while continuing claims for benefits are above their lows, indicating some slowdown in people being rehired after losing their jobs.
Recession Indicators
The Sahm Rule, which states that a recession begins when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months, has not been triggered yet. Another useful predictor of recessions is earnings growth, with NIPA corporate profits growing by 4.3% year-over-year in the second quarter of 2025. This remains positive but is decelerating.
Federal Reserve and Interest Rates
Following the weaker jobs data, markets expect three 25-basis-point Fed cuts in 2025. The softer labor market has made a 25-basis-point cut at the Federal Reserve’s September 17 meeting a virtual certainty. This is expected to help stimulate the economy and prevent a potential downturn.
Recent Market Performance
The S&P 500 reached an all-time high during the week but declined fractionally on Friday following the release of the jobs report. The Magnificent 7, comprising Microsoft, Meta Platforms, Amazon.com, Apple, NVIDIA, Alphabet, and Tesla, outperformed due to favorable legal outcomes and enthusiasm about Elon Musk’s ambitious Tesla performance targets.
What to Watch This Week
There are only four companies in the S&P 500 scheduled to report earnings, including Oracle and Adobe. Producer and consumer inflation rates for August are scheduled for Wednesday and Thursday, respectively. The CPI is expected to rise year-over-year to 2.9% from 2.7%, which is consistent with estimates from the Cleveland Fed.
Conclusion
In conclusion, the labor market is softening, and there are storm clouds on the horizon that could shift the economy towards a recession. However, there is currently little evidence of an impending recession. The Fed is expected to begin rate cuts soon, which should help stimulate the economy. Despite the slight decline on Friday, stocks are still pricing in low odds of recession, and the bond market is less sure of the Fed’s success. It is essential to monitor conditions closely and watch for any changes in the labor market and inflation rates.
