August Jobs Report Miss Sparks 99% Odds of September Fed Cut as Weak Trend Deepens

The August U.S. jobs report reinforced the picture of a labor market cooling more rapidly than policymakers would prefer, though not collapsing. Nonfarm payrolls rose just 22,000, well below economists’ expectation for 75,000, and down sharply from the 79,000 reported in July. The unemployment rate held at 4.3%, matching consensus, while average hourly earnings increased 0.3% month-over-month and 3.7% year-over-year, both in line with forecasts. The weak headline number sent CME Fed funds futures surging to a 99% probability of a quarter-point rate cut at the September 17 meeting, with two cuts by October now priced at 61%, compared to 53% before the release. The move is notable given that the Fed has historically acted only when market expectations cross the 60% threshold, effectively locking in a September cut and strengthening the case for further easing into year-end.

Economists had braced for a soft report after disappointing ADP payrolls earlier this week, but the miss was starker than many anticipated. Private payrolls rose just 38,000 against consensus for 75,000, while government jobs fell 16,000, pulling the overall tally down. Factory employment shed 12,000 positions, more than double the 5,000 loss expected, and wholesale trade employment also fell 12,000. Offsetting some of the weakness, healthcare added 31,000 jobs, though that was below the 12-month average of 42,000, and social assistance rose by 16,000. Still, the gains were insufficient to counteract contraction elsewhere, including in mining and energy extraction, which dropped 6,000. Taken together, the composition showed a labor market under pressure across cyclically sensitive sectors, with defensive categories like healthcare unable to fully plug the gap.

The quality of labor market momentum looks even weaker once revisions are considered. June’s payroll figure was cut by 27,000 to show a net decline of 13,000 jobs, the first outright loss in years outside pandemic disruptions, while July was revised up modestly by 6,000 to 79,000. The net two-month revision was -21,000, reinforcing the trend of downward adjustments that have dogged recent reports. Over the last three months, the average monthly jobs gain stands at just 29,000—a level not seen since the depths of the global financial crisis, except during the 2020 pandemic shock. That rolling average underscores the slowdown: what began as “cooling” in the spring now looks increasingly like stalling.

Average workweek hours remained unchanged at 34.2, in line with consensus, but down from levels earlier in the cycle. In manufacturing, the average workweek slipped to 40.0 hours, reflecting cutbacks, while overtime held flat at 2.9 hours. Meanwhile, labor force participation was steady at 62.3%, and the broader U-6 underemployment measure ticked to 8.1%. Taken in context, these indicators suggest businesses are holding onto workers but scaling back hours and new hiring, consistent with late-cycle fatigue. Wage growth at 3.7% year-over-year is not accelerating, giving the Fed additional cover to pivot focus from inflation to employment risks.

Markets are already extrapolating what the weak data means for policy. CME FedWatch shows a 99% chance of a September cut, with odds of two cuts by October rising to 61%. Expectations for three cuts by December are also firming, underscoring how quickly the easing path is becoming embedded in market pricing. Importantly, this comes against the backdrop of the Bureau of Labor Statistics’ annual benchmark revisions, due Tuesday, which economists expect will subtract 600,000 to 900,000 jobs from the March 2025 payroll level. A similar revision last year subtracted 818,000 jobs and directly preceded the Fed’s surprise 50-basis-point cut. While few expect a repeat this year, a major downward revision could spark debate over whether a larger-than-25-bp move is warranted.

For equities, the situation is complicated. On the surface, a dovish Fed trajectory supports risk assets, but the mechanics matter. A garden-variety 25-bp cut fits the “soft landing” narrative, but if revisions next week reveal the labor market is far weaker than thought, the conversation could flip to whether the economy is sliding into recession. In that scenario, markets may start clamoring for 50-bp cuts, but such a development would not necessarily be bullish for stocks—it would represent an acknowledgment that conditions are deteriorating faster than expected. Investors are therefore parsing not just today’s weak headline, but the potential for next week’s revisions to reshape the story again.

Breaking the data down further highlights the narrowness of job creation. Healthcare, a perennial driver, added 31,000, but well below trend. Social assistance contributed another 16,000. Outside those two categories, most industries showed outright losses or flatlining employment. Federal government jobs fell 15,000, continuing a steady slide since January. Mining and oil extraction lost 6,000, and wholesale trade is now down 32,000 since May. Manufacturing fell by 12,000, with transportation equipment down 15,000, partly due to strike activity. Retail, construction, financial services, leisure and hospitality, and professional services all showed little change. This breadth of stagnation makes it clear the softness is not confined to a single sector but is spread across the economy.

Household survey data mirrored the establishment survey’s weakness. The number of unemployed was essentially flat at 7.4 million, but long-term unemployment is creeping higher at 1.9 million, up 385,000 over the past year. New entrants fell by 199,000, offsetting a July increase, while the number of discouraged workers held steady at 514,000. The employment-population ratio at 59.6% was unchanged but is down 0.4 percentage point over the year. These steady-to-weaker dynamics align with the narrative of a market that is not collapsing but is unmistakably softening.

The broader takeaway is that the August jobs report was weak enough to seal a September cut but not so catastrophic as to trigger panic—at least not yet. The three-month trend, coupled with next week’s looming revisions, will likely matter more for the Fed’s medium-term trajectory than this single print. If the revision strips another 600,000–900,000 jobs from the tally, it could reignite talk of a 50-bp move, though that would represent worsening fundamentals rather than a positive catalyst for risk assets. As such, the labor market data has entered a new phase: one where stabilization is the best outcome, but downside surprises could quickly reshape both Fed policy and equity market sentiment.