Signs of Slack in the Labor Market
Authors & Contributors
The average monthly job gains dropped to just 29,000 in the August Bureau of Labor Statistics jobs report.
Labor market concerns are back in focus after a series of soft job reports. Since April, labor demand has cooled meaningfully, and August showed more of the same pattern with the three-month average of job gains declining to just 29,000. Manufacturing payrolls fell 12,000 in August marking the fourth monthly decline since April’s Liberation Day.
Another sign of growing slack has been the decline in the job-to-applicant ratio, or the ratio of total job openings to the number of unemployed. The ratio in July dipped below parity for the first time in over four years. On September 9, the Bureau of Labor Statistics (BLS) signaled that it could reduce the reported job growth in the year through March 2025 by up to 911,000 jobs when it releases its final annual benchmark revisions early next year. That indicates recent labor market slowing followed a period of more moderate job growth than previously reported.
The Federal Reserve (Fed) is sensitive to shortfalls in employment, and these signs of slack have strengthened the case to resume monetary policy easing. After holding rates steady at 4.25% to 4.5% since last December, the Federal Open Market Committee (FOMC) appears poised to deliver a rate cut at its September meeting, which will be the first move lower this year. The shift reflects growing concern that policy is too tight given the softening in labor demand and the lagged effects of tight monetary policy.
Job Openings and Number of People Unemployed
The center of gravity within the Fed may be shifting. The bias may increasingly tilt toward Board members who favor cutting rates more quickly and substantially, with the goal of easing financial conditions and keeping the labor market from deteriorating further. But the Fed does not have a free hand. Core personal consumption expenditures (PCE) inflation is still running at 2.9% year-over-year, above the 2% target, and tariff-driven price pressures are building. It will take time for tariffs to work through the system and there is a risk that inflation expectations may start to drift. As the above chart illustrates, signs of slack in the labor market are building, and how the Fed sizes up that slack will help determine the pace of easing.
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