Economist Sam Kuhn takes a close look at August's labor market data, highlighting weak points at the brink of a downturn.

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Warning Signs: Labor Market Reaches An Inflection Point

Author: Sam Kuhn
05 Sep 25

Economist Sam Kuhn takes a close look at August's labor market data, highlighting weak points at the brink of a downturn.

The U.S. labor market is edging towards a downturn. Employment growth is at its weakest point in the post-pandemic recovery as the job market added just 22,000 jobs in August with 21,000 in combined downward revisions to June and July’s numbers. The second revision of June’s numbers showed that the labor market contracted by 13,000 jobs during that month—the first overall loss since December of 2020. The unemployment rate rose slightly to 4.3%, indicating that job growth is below “breakeven”—meaning job growth isn’t strong enough to sustain full employment despite significantly lower immigration. 

The overall picture is clear: the labor market is buckling under the pressure of immigration and trade policy in conjunction with elevated interest rates, resulting in significantly weaker hiring demand. The Federal Reserve will certainly reduce interest rates in the September meeting, with another cut in October seeming increasingly likely.  

Sector Breakdown 

Most sectors are now shedding rather than adding jobs. Even Healthcare & Social Assistance—the tentpole industry of recent job growth—slowed down, adding 46,800 jobs compared to a 3-month average of 59,000. Similarly to July’s report, the labor market would have contracted without Healthcare’s contributions. Manufacturing and Professional and Business Services continue their downward trend, hampered by trade policy and elevated interest rates. 

Leisure and hospitality showed a strong bounce back, adding 28,000 jobs following a weaker July report. This was also confirmed in the recent ADP payroll employment release with a much stronger 50,000-job gain.  

Both the 1-month and 6-month payroll diffusion index are now below 50, meaning that more sectors are reducing headcount rather than adding jobs. The 1-month index is typically more volatile, but the last time the 6-month index fell below 50 (not including the pandemic) was May of 2008. 

Another red flag came from the Job Openings and Labor Turnover Survey (JOLTS). Unfilled vacancies have been trending lower for more than a year, crossing an important threshold: there are more unemployed workers than available jobs.  

One way to think about the balance of power between employers and workers is to consider wage growth for job stayers versus job switchers. Coming out of the pandemic, job switching was rewarded heavily as annual wage growth was north of 7% for these workers, suggesting a labor market working in their favor. For the first time in five years, wage growth between these two groups is even, meaning the benefits of staying versus switching jobs is about the same.  

Workforce Insights 

After a three-month decline, the overall labor force ticked up—a positive development after the summer months’ significant cooling warned of labor supply waning under immigration policy pressure. However, the black unemployment rate has been steadily rising, reaching 7.5% in August—its highest rate since October of 2021. Younger workers are also facing a much tougher job market with unemployment rates rising to 10.5%—nearly a four-year high.  

While most of the data has seemed gloomy so far, there were several positive developments on the labor supply side. For example, the prime-age employment-to- population ratio—a reliable indicator of the share of the population that is actively working—ticked up slightly to 80.7%.  

What does this mean for recruiters?  

A softer labor market shifts the balance of power. Outside of Healthcare, fewer openings suggest recruiters may see less pressure to compete for talent with a larger pool of active job seekers. For some employers the challenge may not be filling roles as much as sorting through a higher volume of applicants to find the right fit.  

It’s also increasingly likely that the Federal Reserve will reduce interest rates several more times this year in response to a weakening labor market. While tariffs and immigration policy may continue to tamp down growth, lower borrowing costs for households and businesses could spur investment in 2026, preventing a more severe downturn in economic activity.  

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