Jobs Report Could Seal Fed’s Next Rate Cut

The U.S. labor market will be in the spotlight on Friday morning when the Bureau of Labor Statistics (BLS) publishes the August employment report at 8:30 a.m. ET. Normally, investors would still be focused on inflation, but Federal Reserve officials have recently shifted their emphasis, warning that job market weakness could now be more consequential than stubbornly high prices. That pivot places extraordinary weight on tomorrow’s release, which could effectively seal the case for a rate cut at the Fed’s September 17 meeting. Futures markets already assign a 96 percent probability of a 25-basis-point reduction, according to CME data.

Economists surveyed by Bloomberg expect that U.S. nonfarm payrolls increased by just 75,000 in August, with the unemployment rate ticking up to 4.3 percent from 4.2 percent. Wage growth is seen holding steady: average hourly earnings are projected to rise 0.3 percent month-over-month and 3.7 percent year-over-year. These numbers, if realized, would confirm the slow-bleed pattern evident throughout the summer—consistent with a labor market losing momentum but not collapsing outright. Still, anything softer could reinforce the perception that the Fed has little choice but to act.

This week’s run of jobs-related data points to more softness ahead. The ADP employment report on Thursday showed that private-sector firms added just 54,000 jobs in August, a dramatic slowdown from July’s revised 106,000. The Labor Department’s initial jobless claims report added to the gloom: claims rose to 237,000, the highest level since June, even though continuing claims remained relatively stable at 1.94 million. Meanwhile, the JOLTS report revealed that the number of job seekers has now surpassed the number of open positions for the first time since 2021, underscoring that the labor market’s balance is shifting. ISM surveys were no more encouraging. Manufacturing remained in contraction, with an employment index of 43.8, while ISM services employment came in at 46.5—marking a third straight month of contraction in the services workforce. Taken together, the numbers portray a job market that is cooling across both the factory floor and the office.

The July jobs report set the tone for heightened scrutiny of Friday’s release. The BLS reported that just 73,000 jobs were created in July, well below expectations of 115,000. More damaging, May and June’s tallies were revised down by a combined 258,000, leaving the three-month average at a meager 35,000—excluding the pandemic shock, the weakest pace in nearly 15 years. The revisions triggered political fallout as President Trump fired BLS Commissioner Erika McEntarfer, accusing her without evidence of manipulating the data. He has since nominated E.J. Antoni, chief economist at the Heritage Foundation, to lead the bureau, raising questions among economists about the politicization of data collection. The controversy ensures that Friday’s report will be dissected not just for its headline figures but for its credibility as well.

The politics are further complicated by the upcoming benchmark revisions. On September 9, the BLS will publish its annual realignment of payroll data, and expectations are for another downward adjustment—Nomura sees a reduction of between 600,000 and 900,000 jobs for the year ending March 2025, while Pantheon Macroeconomics forecasts a 750,000 cut. That would echo last September’s shock, when the BLS revised payrolls down by 818,000, the steepest negative adjustment since 2009, which prompted the Fed to deliver an emergency 50-basis-point cut. With those memories fresh, traders are wary that tomorrow’s figures may understate the extent of job market weakness, only to be exposed later.

Inside Friday’s report, analysts will be watching sectoral details for confirmation of the trends hinted at by other data. Health care and education, which have accounted for the lion’s share of job creation this year, may cool below their recent three-month average of 67,000. Excluding those sectors, job creation has been essentially frozen, adding to concerns that the broader market is stalling out. Construction and manufacturing may also see weakness as tariffs bite into input costs and Trump’s immigration crackdown reduces available labor. Several Fed districts noted in the Beige Book that firms are trimming headcounts through attrition and leaning more on automation and AI tools, a structural shift that complicates efforts to stabilize employment.

The stakes for the Federal Reserve are high. Chair Jerome Powell used his Jackson Hole speech to stress that the committee is now more focused on employment risks than on inflation, which has been stuck above the 2 percent target. A string of weak jobs numbers, capped by another soft August print, would provide the Fed cover to cut rates and argue that it is fulfilling its dual mandate. Market participants see little ambiguity: unless Friday’s report surprises with a massive upside number—something closer to 225,000 jobs—odds are high that the Fed will move. Michael Gapen of Morgan Stanley suggested that only a figure that strong would be enough to persuade policymakers to hold steady.

Friday’s release thus sits at the intersection of economics, policy, and politics. On one side, slowing payroll growth, rising unemployment, and downward revisions point to a labor market at risk. On the other, inflation remains elevated and tariff policy continues to stir uncertainty. Layered atop is the political storm surrounding the BLS and concerns about data reliability. In this charged environment, even a routine release can reverberate through markets, the Fed, and the 2024 election cycle. Investors will be parsing every line of Friday’s report for clarity, but they may not like what they find.