For months—perhaps even years now—the labor market has trucked along and allowed the Federal Reserve headspace to contend with its favorite problem child: inflation.
But more recently, data in the labor sector has weakened. So much so that the Federal Open Market Committee (FOMC) could be forced back to weighing both sides of its mandate (maximum employment and inflation at 2%) equally. To stabilize the former might require them to cut rates.
Today’s jobs report has done little to inspire confidence. The Bureau of Labor Statistics reported that in August nonfarm payroll employment added a subdued 22,000 roles, with the unemployment rate holding steady at 4.3%. New jobs came from the health care sector, but were offset by losses in the federal government as well as in mining, quarrying, and oil and gas extraction.
Economists will be interested in the demographics contributing to unemployment, with the number of long-term unemployed staying relatively unchanged at 1.9 million last month. That being said, this cohort now accounts for more than 25% of unemployment. Conversely, green shoots can be seen from new entrants (those searching for a job for the first time); their numbers decreased by 199,000 last month—largely offsetting a drop the month prior.
Further signs of sickness can be seen in job openings. This week’s Job Openings and Labor Turnover Survey (JOLTS) came in below analysts’ expectations, with available positions down to 7.18 million from a 7.36 million reading in June. A key driver in the downturn was in health care, which had provided a boost to openings in recent reports. Elsewhere retail trade, leisure, and hospitality also posted downturns in openings.
A gamut of issues could be contributing to the graying picture, with economists speculating it could be anything from AI job displacement to slower hiring because of Trump 2.0’s policies, or because of fundamental shifts in supply.
Depending where you land in the debate, it might also help answer the question of why the BLS was forced to make such significant revisions to its data for earlier this year. Last month the Labor Department reported payrolls grew by just 73,000 in July, well below forecasts for about 100,000. It also revised down estimates for May and June, by a cut of 258,000, putting the gain over those three months at 35,000.
If the early signals of labor market weakness prove persistent, all of that could change. What economists—and the Fed—really need to know, is the causation.
A major factor shaping the employment market is uncertainty, namely how much decision-makers batten down the hatches against Trump-induced headwinds.
Immigration and confidence are two major considerations for David Doyle, Macquarie’s head of economics. He describes the current market as “low turnover,” with few layoffs but limited hiring, too—hinted at by spiking numbers in unemployment owing to new joiners to the labor force.
That lack of hiring is the result of uncertainty, Doyle told Fortune: “When there’s elevated uncertainty, one of the easiest things to do is to delay new hiring decisions. Maybe when [decision-makers] have more clarity on the outlook for their companies and the future earnings growth, that could pave the way for … the handcuffs to come off.”
There’s also been a “significant” shift in immigration policy, Doyle added, which is keeping the unemployment rate stable as lower hiring is met with a shrinking labor supply. However that near equilibrium can only be maintained to a point, he added: If confidence or any positive fiscal stimulus arrives courtesy of the One Big Beautiful Bill Act, then firms may find themselves trying to hire without anyone to fill the positions—an outcome which may materialize early in 2026.
With the margins so small in either direction—just 73,000 jobs created last month—that leaves little room for error, Doyle added: “We’re in this equilibrium, but if the layoffs pick up even a little bit you could see that throw the equilibrium off, and unemployment starts to rise. The flip side of that is once we get beyond that near-term softness, near-term weakness, it’s possible things go the other way and unemployment can fall.”
According to the study, industries involving computer and math roles (where AI was adopted more widely) are among the sectors seeing the highest levels of unemployment—though how much of this is the result of displacement, or a rebalance following COVID-era hiring, is up for debate.
What stands out to Ozkan not only in his AI displacement work, but also his labor market research more widely, are the demographics searching for jobs: younger people and college grads. According to his research on recent college graduates, “traditionally the most employable demographic” is seeing unemployment rates of 4.59% compared with 3.25% in 2019—a 1.34 percentage point increase that far exceeds that of other groups. Meanwhile, noncollege workers in the same age group saw only a 0.47 percentage point increase during the same period.
“That said, for the first time in decades, higher education is providing less employment protection during an economic transition, signaling a fundamental shift in how technological change affects the workforce,” Ozkan added.
Economists will have trained a keen eye on the data for younger labor in the coming months, as often the summer jobs market means those in the age 16 to 24 category find themselves seasonally employed and out of work come autumn—an indicator to watch out for in a month or two’s time.
To be sure, many of the factors shaping the labor market at present are here to stay. And there’s one additional issue which could exacerbate the current tensions.
Doyle explains: “There’s also been a surge in retirements this year. The first baby boomers that were born in 1946, they’re now turning 80, and you cascade down from that—I believe the last baby boomer year was 1964—so even the youngest baby boomers are into their sixties now. You now have this huge generation that is gonna be [a] drag on labor force growth.”
This makes the Fed’s job significantly harder in the coming years, he added: “It’s trickier to try and navigate when you have what’s going on in the labor market, when you have these structural developments occurring, and trying to separate that from cyclically what’s going on in the economy.”
The tightrope the labor market will have to walk makes it “vulnerable,” Nancy Vanden Houten, lead economist at Oxford Economics, tells Fortune: “With the pace of hiring weak, any rise in layoffs risks triggering a cycle of cuts in consumer spending that lead to more layoffs and so on. We’ve started to see some hints of more layoffs in [this week’s] JOLTS report, initial jobless claims are inching higher, and layoffs were mentioned a bit more in the Federal Reserve’s Beige Book, released [Wednesday].”
Both Doyle and Vanden Houten also defended the BLS revisions (with criticism having come the loudest from the White House itself), arguing participation in reporting is dropping off, and as such, outcomes have less evidence to model from.
This caveat will be nothing new for the Fed when it meets later this month, and will contribute to a shift in priorities: “We expect concerns about the labor market will outweigh concerns about inflation at this month’s meeting and the FOMC will cut rates,” Vanden Houten says.
So while economists are not yet eyeing a labor-related recession, they believe the Fed will need to act swiftly to bolster the market as it begins to tremble.
