U.S. Jobs Report: From Resilience to Contraction

The August jobs report signaled a sharp labor market slowdown, with just 22,000 jobs added and unemployment rising to 4.3%. Broad-based job losses and cooling wage growth increase pressure on the Fed to cut rates, starting in September. For equities, Fed support may cushion markets in the near term, but without a labor rebound, risks remain skewed to the downside.

Labor Market Weakness Emerges

On Friday, the August jobs report dealt another blow to the narrative of resilience in the U.S. economy. Only 22,000 jobs were created last month, well below the 75,000 expected, with June data revised to show outright losses. The unemployment rate rose to 4.3%, its highest since 2021, highlighting mounting strain on both households and businesses. Over the last three months, job growth has averaged fewer than 30,000 per month—a sharp contrast to the steady hiring that carried the economy out of the pandemic slump. The trajectory has shifted decisively from moderation to contraction.

Broad-Based Sectoral Strain

The deterioration reflects both structural and cyclical headwinds. Uncertainty from tariffs has weakened business confidence, especially in manufacturing and durable goods, which have posted job losses for four consecutive months. Professional and business services—a key gauge of corporate investment—cut 17,000 jobs, reflecting a pullback in white-collar hiring. Government payrolls also fell by 16,000, reinforcing the picture of widespread weakness. The only notable gains came from health care and education, sectors less exposed to economic cycles, though not enough to offset declines elsewhere.

Implications for Monetary Policy

The weak labor data has immediate consequences for the Federal Reserve. Futures markets now price in a near-100% probability of a rate cut in September, with a 12% chance of a half-point cut. Additional cuts are expected in October and December.

While the Fed has been cautious about moving too quickly—fearing renewed inflationary pressures—the slowdown in wage growth (down to 3.7% year-over-year from 3.9% in July) provides cover for action. This signals easing inflation risks from the labor market side, giving the Fed space to cut without undermining its credibility.

Equity Market Outlook: A Paradox

The implications for equities are mixed:

Headwinds: Weak labor data suggests growth is stalling, raising concerns about earnings sustainability. Industrial, construction, and business services sectors are likely to remain under pressure.

Tailwinds: Falling bond yields and expectations of Fed easing offer support. Technology stocks, already benefiting from strong secular demand, are well-positioned to gain from lower discount rates and safe-haven status.

The Road Ahead: Fragile Equilibrium

Looking forward, U.S. equities face a balancing act between slowing momentum and supportive monetary policy. While a 4.3% unemployment rate isn’t catastrophic on its own, the negative trend is concerning. Continued job losses could weaken consumer spending at a time when affordability is already squeezed by high interest rates and elevated prices.

Housing remains subdued, with fewer than 30% of homes affordable for typical households. A weaker labor market risks deepening slowdowns in both consumption and construction.

In the short term, markets are likely to rally on Fed support, with tech and growth leading the charge. But the durability of such rallies hinges on whether rate cuts stabilize employment and restore confidence. Without that, earnings downgrades will eventually weigh on valuations, particularly in cyclical sectors.

The broader picture points to a fragile equilibrium: equity markets may hold up with Fed support, but without a turnaround in labor trends, risks remain tilted to the downside.