Bad news on jobs is good news for financial markets

Bottom line

The combination of weaker-than-expected employment data across the board in August, in conjunction with moderating inflation, should seal the deal for the Federal Reserve to issue a quarter-point interest rate cut at its policy-setting meeting ending September 17. Consequently, benchmark 10-year Treasury yields plunged this week from 4.30% to 4.06%, while the S&P 500 surged nearly 3% to a new intraday record high of 6,532.

Headline nonfarm payrolls rose by a lower-than-expected 22,000 jobs in August (consensus at 75,000, Federated Hermes at 93,000), with an additional downward revision of 21,000 jobs in the two prior months. June was reduced from a gain of 14,000 to a final loss of 13,000 jobs, the first such decline since December 2020. July was revised from a preliminary gain of 73,000 jobs to an increase of 79.000. Those revisions collectively reduced August's announced gain of 22,000 jobs to an adjusted gain of only 1,000.

The trend is not your friend Over the past four months, nonfarm payroll gains have averaged only 27,000 jobs per month, the weakest pace since the depths of the Covid pandemic. That compares with average monthly increases of 123,000 over the first four months of 2025 and 168,000 during 2024.

Private payrolls posted a weaker-than-expected increase of only 38,000 jobs in August (consensus at 75,000). But June and July were collectively revised downward by a combined 36,000 jobs. June was reduced from a gain of only 3,000 to a final loss of 27,000 jobs, and July was lowered from an increase of 83,000 to a gain of 77,000. Those revisions reduced August's announced gain of 38,000 private payrolls to an adjusted increase of only 2,000 jobs.

Wonky August? Word of caution: August is historically the quirkiest month of the year for the labor market. With schools restarting, summer vacations ending and factories re-tooling plants, there's an increased flow of workers moving in and out of jobs. The data typically gets fixed with revisions in September and October, but the financial markets don't wait for revisions to react, as we saw this morning. Perhaps that's the genesis of the comment made today by Kevin Hassett, chair of the National Economic Council, who predicted that nonfarm payrolls will be revised up by an estimated 70,000 in coming months.

Unemployment rising More bad news in that the rates of unemployment and labor impairment rose to 4.3% and 8.1% in August, respectively - each their highest level since October 2021 - and hours worked clocked in at a weaker-than-expected 34.2 for the third consecutive month.

Some positives Household employment rebounded to a gain of 288,000 jobs in August, up from a loss of 260,000 jobs in July. In addition, the participation rate ticked up to 62.3% in August from a nearly three-year low of 62.2% in July. Finally, wage inflation eased to a lower-than-expected 3.7% year-over-year (y/y) in August, down from 3.9%.

Fed warming up in the bullpen? This has been a tough week for the labor market. Released Wednesday, the July Job Openings & Labor Turnover Survey (JOLTS) report came in at a 10-month low of 7.18 million openings. On Thursday, the ADP report in August posted a much weaker-than-expected gain of only 54,000 jobs, half the pace of July. Last week's initial weekly jobless claims rose to their highest level in two months, and the Challenger job cuts rose 39% in August from July. The pace of average hourly earnings growth slowed to 3.7% in August, and unit labor costs rose only 1.0% in the second quarter, down from an outsized 6.9% first-quarter increase.

On Tuesday, the Labor Department will release its Quarterly Census of Employment and Wages. We are expecting another sizable downward revision of perhaps 600,000 to one million jobs. Last year, Labor revised payrolls down by 818,000 jobs. Considering the slowdown and that inflation seems to be moderating, we at Federated Hermes anticipate the Fed will issue two quarter-point cuts, one in September and in December, followed by quarterly cuts of the same magnitude in 2026. That would reduce the upper band of the fed funds rate from its present 4.5% to 3.0% by year-end 2026.

DOGE impact Federal government payrolls have collectively declined by nearly 100,000 jobs over the past seven months through August. But according to Challenger, Gray & Christmas, the Trump administration has reduced government payrolls by almost 300,000 federal workers over this period. Employees who are on paid leave or receiving severance are still counted as employed, and some workers may have already found new jobs in private industry. Bloomberg expects at least a half million US jobs could be impacted when counting universities, contractors, nonprofits and others who rely on government funding.

Immigrant deportation is a factor The participation rate for foreign-born workers declined from 67.6% in August 2024 to 66.4% last month, and the number of employed foreign-born workers declined 2.6% over the past year. Immigrant labor participation had been rising strongly over the past few years. In contrast, the native-born participation rate slipped from 61.7% in August 2024 to 61.6% last month but the number of employed native-born workers increased 2.1%.

Key labor-market indicators were weak:

• ADP private payrolls fall August posted a weaker-than-expected gain of only 54,000 jobs (consensus at 68,000), down by nearly half from a gain of 106,000 jobs in July. Workers who changed jobs last month saw their wages rise by 7.0% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest boost of 4.4% y/y, well below the peak of 7.8% in September 2022.
• Initial weekly jobless claims grow This high-frequency leading employment indicator rose to a two-month high of 237,000 for the week ended August 30.
• Challenger, Gray & Christmas layoffs soar Employers announced that layoffs of nearly 86,000 in August surged more than 13% from a year ago and were 39% higher than July's 62,000.
• JOLTS declines July job openings fell to a weaker-than-expected, 10-month low of 7.18 million, down 2.4% from 7.36 million in June and 41% below a record 12.182 million job openings in March 2022. The rate of job openings fell to a four-month low of 4.3% in July, well below a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker fell to a four-year low at 1.0 in July, down sharply from a peak of 2.0 in March 2022.

Unemployment, labor impairment & participation rates rise Household employment (an important leading employment indicator) rebounded by 288,000 jobs in August, up sharply from a decline of 260,000 jobs in July. The unemployment rate (U-3) rose a tick to a four-year high of 4.3% in August, well above April 2023's 53-year low of 3.4%. The Fed expects U-3 to rise to 4.5% by year end. The labor impairment rate (U-6) also rose to a four-year high of 8.1% in August, up from 7.9% in July and 7.7% in June, well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate surprisingly increased a tick to 62.3% in August. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

Wage inflation & hours worked decline Average hourly earnings rose by an in-line 0.3% m/m in August. But wage growth surprisingly slowed to a 3.7% y/y gain in August, down from a 3.9% y/y increase in July. The Fed is targeting a 3% bump. Meanwhile, average weekly hours worked surprisingly ticked down to a weaker-than-expected 34.2 in August for the third consecutive month. Each change of 0.1 hour worked is the equivalent of subtracting an estimated 350,000 jobs from the economy. Employers tend to reduce a worker's hours before they cut staff.

K-shaped recovery gap widens The unemployment rate for highly educated workers was steady at 2.7% in August, up from September 2022's cycle low of 1.8%. But that of less-educated workers soared to 6.7% in August from 5.5% in July, well above its 31-year low of 4.4% in November 2022.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 10,000 jobs in August for the fourth consecutive month and for the seventh time in eight months. This sector has lost jobs in 37 of the past 40 months.
• Manufacturing lost a worse-than-expected 12,000 jobs in August (consensus at a loss of 5,000). This sector has been breakeven or lost jobs in five consecutive months, perhaps related to tariff uncertainty.
• Construction lost 7,000 jobs in August, shedding workers for the third consecutive month. We expect construction to accelerate after last year's hurricane and wildfire damage.
• Retail added 11,000 jobs in August and 7,000 jobs in July, after losing 5,000 in June and 15,000 jobs in May. Back-to-School spending has been strong.
• Leisure & hospitality rebounded with the strongest hiring in five months, adding 28,000 workers in August, up from only 6,000 workers in July and a loss of 5,000 jobs in June.

Read more about our current views and positioning at Capital Markets.

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