Labor Market Cracks Widen, Market Eyes Fed Cuts — Evening Brief – 09.05.25
The dismal August U.S. jobs report delivered another signal for the Federal Reserve to cut interest rates at its September meeting. Nonfarm payrolls increased by just 22,000, well below the 75,000 consensus and a sharp slowdown from July’s 73,000. Revisions shaved another 21,000 jobs from June and July, with June now showing a rare outright decline. That brings the three-month average gain to just 29,000, levels typically associated with pre-recession conditions.
Markets quickly adjusted expectations for monetary policy. The CME FedWatch Tool now assigns an 100% probability of a 25-basis point cut in September, while the odds of a larger 50-basis point cut rose to 11.7%. The probability of two cuts by year-end has climbed above 50%, as investors bet the Fed will need to respond aggressively to mounting signs of labor market fragility.
The headline unemployment rate rose to 4.3%, as both employment and unemployment increased in the household survey. The headline gain of 288,000 employed masked an important deterioration: full-time jobs fell by 357,000, the second consecutive monthly drop, while part-time jobs surged by 597,000, the largest increase since February. Wage growth moderated, with average hourly earnings up 0.3% month-on-month and 3.7% year-over-year, down from 3.9% in July.
At the same time, the number of unemployed workers rose by 148,000 to 7.384 million, leaving the labor force at 170.778 million. Labor force participation improved slightly to 62.3% from 62.2%, reversing last month’s drop to a three-year low, while the employment-population ratio held steady at 59.6%. Both measures are down 0.4 percentage point from a year earlier, reflecting erosion in longer-term labor market strength.
Beyond the BLS report, leading indicators have been flashing red. Jobless claims rose through the survey window, ISM employment indices remain in contraction, ADP private payrolls slowed to 54,000 from 106,000, Challenger layoffs accelerated to 86,000 from 62,000, and July JOLTS job openings fell to near post-pandemic lows.
Taken together, the data portray a labor market that has moved beyond gradual cooling and is now showing clear signs of deterioration: headline payroll growth near stall speed, falling full-time jobs, rising layoffs, and weaker wage momentum. For policymakers, this increases pressure to shift decisively toward easing, even as they remain wary of sticky inflation tied to tariffs and supply-side constraints.