Labor Market Slowdown Builds as August Jobs Report Shows Unexpected Weakness

Key Takeaways

• The US economy added 22,000 jobs in August, far fewer than economists expected.
• The unemployment rate ticked up slightly to 4.3%.
• Market watchers are confident that the Federal Reserve will cut interest rates at its September meeting and are increasing their expectations for more cuts by 2026.

The August 2025 nonfarm payrolls report showed more evidence of a slowdown in the US labor market against the backdrop of tariffs, stubborn inflation, and an uncertain economic outlook.

Employers added 22,000 jobs over the course of the month, according to data released Friday by the Bureau of Labor Statistics. That’s significantly fewer than the 110,000 jobs economists expected, according to FactSet’s consensus estimates, and well below gains of 79,000 in July. During June, the US economy lost 13,000 jobs.

The unemployment rate rose to 4.3% from 4.2%.

“The trend of softening employment data continues,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth.

The slowdown could have major consequences for the Federal Reserve, which has for months kept interest rates steady as it awaits further progress in bringing down inflation. Markets believe a deteriorating labor market strengthens the case for a rate cut in September and increases the likelihood of additional cuts through the end of the year, even as inflation remains above the Fed’s 2% target.

Post-Covid Job Boom Comes to an End

The US economy has added jobs at a sluggish pace of just 0.2% on an annualized basis for the past three months, says Morningstar senior US economist Preston Caldwell. That’s thanks in part to negative growth for June.

“If this rate of growth persists, it will mark a significantly weaker-than-normal job market,” Caldwell says. In 2024, employment grew at a rate of 1.3%. Between 2017 and 2019, the economy added jobs at an average annual rate of 1.5.%.

“It appears the post-covid employment boom has fully run its course‚” Morningstar’s Pappalardo says. “These numbers look much more like the typical pre-covid report.”

Slowdown Across Industries

The slowdown in job growth over the past few months has been spread “broadly across industries,” Caldwell says. In August, gains in the healthcare category were offset by losses in federal government, mining, quarrying, and oil and gas jobs.

Over the past six months, Caldwell says that the healthcare category has accounted for more than the total jobs added in the United States, with the addition of 549,000 jobs, compared with losses of 145,000 jobs in the private sector and 19,000 jobs in the public sector.

Over the past three months, job gains in manufacturing have declined at a 1.3% annualized pace. That’s despite tariff hikes that were expected to boost domestic production, Caldwell says.

Federal government jobs have now fallen by roughly 100,000 over the course of this year, Pappalardo says, as the Donald Trump administration’s cuts to the federal workforce continue to take effect.

Wage Growth Slows

August’s data shows that wages continue to rise, albeit at a slower pace than in previous months.

Average hourly earnings have risen 3.6% on an annualized basis over the past three months—lower than the average of 4.0% in 2024—even as inflation has remained elevated. For Caldwell, that’s evidence of a softening labor market and an excess of supply over demand.

How Much Will the Fed Cut Rates in 2025?

Market expectations for interest rate cuts from the Federal Reserve shot higher in the wake of Friday’s data.

“A Fed rate cut in September’s meeting is virtually guaranteed now,” Caldwell says. “Furthermore, today’s data has led to a shift in market expectations for future cuts.”

In the bond market, futures traders now see a roughly 65% chance that the Fed will cut rates by 0.75 percentage points by its December meeting, according to data from the CME FedWatch Tool, which would amount to three 0.25-percentage-point cuts. That’s up from 46% odds on Sept. 4, the day before the jobs data was released.

Markets also see a cumulative 1.5 percentage points in easing by the end of 2026, Caldwell says, compared with 0.5 percentage points two months ago. That change is “driven almost entirely by the weak data in the last two months’ jobs reports,” he says.