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Weak jobs report cements September rate cut

September 5, 2025 | 2 min read
Magdalena Ocampo
Market Strategist
Christian Floro, CFA, CMT
Market Strategist
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The August jobs report showed a 22,000 gain in payrolls, missing consensus expectations, and revised the past two months’ releases, including a contraction in June’s jobs. The unemployment rate edged up to 4.3%, likely reinforcing the notion that the decline in labor supply is keeping the labor market somewhat in balance. The increasing weakness in jobs since May, however, could revive recessionary concerns if the labor market deteriorates further in the coming months.

Non-farm payrolls

Thousands, January 2022–present
Graph showing non-farm payrolls from January 2022 to present

Source: Clearnomics, Bureau of Labor Statistics, Bloomberg, Principal Asset Management. Data as of September 5, 2025.

Report details

  • Total non-farm payrolls increased by 22,000 in August, below expectations of 75,000. Last month’s print was revised to 79,000 (up from 73,000), though the June print was revised down to -13,000 (from +14,000), bringing the 3-month moving average to 29,000. The payrolls releases since May have deepened concerns about the health of the labor market and the underlying economy. Any ongoing deterioration in the labor market, combined with lingering inflation concerns, may complicate the outlook for equities ahead. For the Fed, the negative payrolls report in June may shift the debate toward whether a more aggressive rate cut at this month's Fed meeting, or additional cuts late this year, are necessary.
  • The overall job growth in August was slightly mixed across industries, albeit jobs contracted in more industries than in July. The healthcare and leisure & hospitality sectors led employment gains, though job gains in healthcare, which has been a major driver of growth over the past year, have continued to cool. Leisure & hospitality, on the other hand, posted the highest gains since March. Government payrolls declined, amid an acceleration in job losses among federal workers. An ongoing reduction in the federal workforce and a pullback in federal government grant spending will likely continue to weigh on overall employment in the sector.
  • The construction sector saw job losses, underscoring how tariffs, elevated rates and the slowdown in housing activity remain ongoing challenges. Trade policy uncertainty also appears to be affecting the manufacturing sector, which saw jobs decline last month, bringing the total decline to 38,000 for the year. Professional and business services recorded a fourth straight decline in August, with losses concentrated in administrative and support roles, especially temporary help, which is often seen as a bellwether for labor demand.
  • Average hourly earnings rose 0.3% in August, right in line with expectations and flat versus the prior month, though the annual rate missed expectations and slowed to 3.7% from 3.9% in July. The unemployment rate, which rose a touch to 4.3%, does not appear recessionary, though there’s evidence that labor conditions have become increasingly difficult, with the duration of unemployment on an uptrend. Nevertheless, the slight uptick in the unemployment rate amid weaker labor demand signals suggests the shrinking labor supply may still be somewhat offsetting weakening labor demand. The administration’s tighter immigration policies could intensify this trend if there are further declines in the foreign-born labor force. Therefore, balancing the signals between labor supply and labor demand remain imperative for interpreting employment conditions in the coming months, though a September rate cut seems almost inevitable.

Policy outlook

While there’s acknowledgement by economists and policymakers that labor demand has been incrementally slowing, concerns have been tempered by a low-firing environment. Last month, however, the two dissents amongst FOMC members revealed increasing worries about labor demand within the committee. The Fed kept the policy rate steady, nevertheless, as Chairman Powell noted that a shrinking labor supply was keeping the labor market in balance.

After today’s weak payroll print, a June contraction, and four consecutive months of sub-100,000 gains, a September rate cut is virtually guaranteed. The focus will now likely shift to the magnitude of the cut and the potential for additional reductions. While markets might see a September rate cut as a proactive measure, any further deterioration in the labor market could swiftly change the narrative from viewing rate cuts as stimulative to seeing them as a response to a faltering economy.

Investors should be cautious about interpreting weaker payroll figures as immediate indicators of recession. The deceleration in labor force growth due to tighter immigration policies may obscure increasing slack and help maintain equilibrium in the labor market. As long as layoffs remain limited, even with a potential slowdown in labor demand, the market may continue to perceive rate cuts as strategic efforts to foster growth, rather than reactive measures to economic distress.

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