Macro Consensus Challenger: Jobs Report Puts 50bp September Fed Cut in Play

Summary

• NFPs were much lower than expected but unemployment increased only marginally due to lower immigration and labour supply growth.
• The report indicates downside risks to employment.
• Despite much slower labour supply growth, wage growth continued slowing, which supports disinflation but is negative for growth.
• A 50bp September Fed cut is likely if the QCEW shows much lower employment than currently estimated. CPI still shows no sign broadening price pressures, and long-term BEs remain stable.

Market Implications

• I still expect two-three Fed cuts in 2025 in line with market pricing.

Labour Demand Weakens Further

NFP shows rising employment risks and falling inflation risks that put a 50bp cut in play at this month’s FOMC.

August payrolls were well below expectations at 22k versus 75k consensus (Chart 1). This brought the 6mma to 64k, down from 78k in July. Private employment increased by 38k, well below expectations of 75k, while Federal government employment contracted further (Chart 2).

Nevertheless, the labour market remained balanced. Unemployment increased by 10bp to 4.3%, which is low by historical standards (Chart 3). The much smaller move in unemployment than NFP reflects labour supply growth slowing. Breakeven employment growth is falling, largely due to the end of mass immigration (Chart 4).

The report adds upside risks to unemployment and downside risks to inflation.

Chart 1: NFPs Downtrend Getting Worse	Chart 2: Federal Jobs Keep Contracting
Chart 3: Unemployment Remains Low	Chart 4: Lower Breakeven Employment

Rising Employment Risks

The report adds further downside risks to employment.

The birth/beath adjustment (B/D estimates job gains and losses from business formation and closure) contributed 90k to private employment. Because the B/D adjustment is not seasonally adjusted, it cannot be directly applied to seasonally adjusted monthly payroll changes. However, the 12m change in NSA private payrolls excluding B/D adjustment was only 74k in August. Since the pandemic, B/D have accounted for an abnormally high share of employment growth (Chart 5).

Employment growth was concentrated in a few sectors, with health accounting for the largest share (Chart 6).

The spread of minorities unemployment over white unemployment rose further though it remained well below the average of the last three recessions (Chart 7).

The share of unvoluntary part-time workers (‘part-time for economic reasons’) increased further, though very gradually (Chart 8).

The reasons for unemployment have been changing, with quits accounting for an increasingly smaller share of the total, a sign workers feel less confident they will find a new job (Chart 9). Also, laid off workers and entrants to the labour force have found it harder finding jobs.

This loosening of the labour market is confirmed by the JOLTS released earlier this week. Relative to job openings, the number of actual hires and openings have been rising (Chart 10)

Chart 5: Job Growth Driven by B/D Model!	Chart 6: Concentrated Job Growth
Chart 7: Higher Minorities Unemployment	Chart 8: More Unvoluntary Part-timers
Chart 9: Fewer Quits	Chart 10: Easier to Find Workers!

US Wage/Labour Supply Dynamics Becoming Like Japan’s?

Striking about recent employment reports is that despite the sharp decline in labour supply, wage growth has continued slowing. Nominal wage growth slowed to 3.7% in August, down from 3.9% in July and the wage premium for job quitters has been negative for the past three months (Charts 11 and 12).

With the tariff-induced inflation acceleration, August real wage growth slowed to 0.8% YoY, down from 1.5% in April, while real wage income growth (wages times employment) has slowed since end-2024 (Charts 13 and 14).

The end of mass immigration is lowering labour supply and exposing the rapid aging of native-born workers (Chart 15 and 16). In January 2020, i.e., just before the pandemic and ensuing immigration surge, the CBO expected breakeven NFPs of about 50k starting in 2024-25, compared to breakeven of about 150k in 2019. Contrary to received wisdom, this very fast labour supply growth slowdown seems to be translating into low inflation, a development like Japan’s, at least up to the pandemic.

Slower labour supply and wage growth likely reflects that migrant workers add to economic demand and the supply. Also, aggregate demand has been hit by fiscal consolidation and by extreme policy uncertainty, which has negatively impacted labour demand.

Slower wage growth suggests the tariff-induced price increases are unlikely to become a generalised and lasting inflation increase.

However, slower wage growth also implies the Trump administration could struggle with its goal of putting ‘Main Street ahead of Wall Street’ and of lifting real wages of low-income Americans. The slowdown in wage growth has been accompanied by a widening of the difference between high and low wages growth (Chart 17). Also, in Q2 the share of labour in national income remained near post-WWII lows (Chart 18).

Chart 11: Wage Growth Still Slowing	Chart 12: Job Switchers Are Worse Off!
Chart 13: Real Wage Growth Is Falling	Chart 14: Real Wage Income Is Slowing
Chart 15: Migrant Participation Higher	Chart 16: Migrant Employment Is Falling
Chart 17: Low-wage Earners Still Losing Out	Chart 18: Wage Income Share Still Falling

Market Consequences

Overall, the downside risks to the labour market I identified in last month’s jobs report have strengthened. August’s report is also consistent with my view that US growth is not accelerating.

St Louis Fed President Musalem, one of the more hawkish and economically-minded FOMC members, stated this week, ahead of the NFP, that inflation risks had decreased and employment risks had increased. The jobs report supports this view.

As Governor Waller stressed, once the labour market weakens, it tends to weaken fast, which speaks for pre-emptive easing, inflation permitting. Friday’s stronger signs of labour market weakness suggest a 50bp cut is in play at this month’s FOMC. Based on current data, I see risks of a 50bp cut in September near but below 50%.

A 50bp cut would require:

• A QCEW estimate of March employment well below the current number of 135.7mn. In his Jackson Hole speech, Chair Powell stressed the QCEW was likely to lead to ‘material’ downward NFP revisions.
• A CPI print showing no inflation contagion from tariffed goods to non-tariffed goods and to services.
• Stable long-term BEs.

I still expect two-three cuts in 2025, in line with market pricing.

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