Hi, everyone. I am Liz Ann Sonders, and this is the September Market Snapshot. As always, thanks for tuning in. In this short video, I will discuss the latest labor market report, including this week's pretty eye-popping benchmark revision, and show the impact the data has had on expectations for monetary policy from the Federal Reserve.
[High/low chart for "Payrolls sinking" for Monthly change in nonfarm payrolls is displayed]
So the Bureau of Labor Statistics, BLS for short, their August employment situation report revealed the labor market that is notably cooling. You had non-farm payrolls increase by a pretty scant 22,000 jobs last month, a level of growth that is effectively flat compared to prior months. And in fact, courtesy of downward revisions to the prior few months of readings, June is now tracking as a negative month for payrolls, and that's the first since December of 2020.
[High/low chart for "Record-breaking downward benchmark revision to payrolls" for Preliminary benchmark revisions for nonfarm payrolls is displayed]
Now, consensus expectations were for another weak report after the prior month's disappointing rating. A few days following the release of this month's report, we got the preliminary estimate of the annual benchmark revisions for the one-year period through March of this year. So those annual revisions are based on the Quarterly Census of Employment and Wages, or QCEW Survey, and that showed that nonfarm payrolls were overestimated by 911,000 jobs. That marked one of the largest downward revisions in BLS history for that benchmark revision.
Now, as a reminder, when payrolls are initially reported, the tally is based simply on surveys of companies, while this benchmark revision comes from unemployment insurance tax data. Now, it's a preliminary estimate. We will get the final revision tally for the year ending in March. That will be reported next February.
[High/low chart for "Cyclical industries dragging down employment" for Employment by sector is displayed]
Now, all signs are pointing to a labor market having lost some pretty meaningful steam. If you look at the past three months of economic sector-based trends, you can see that there's substantial gains still in what I would define as the non-cyclical categories of education and health services. But those gains have been at least partly offset by weakness in the more cyclically-oriented sectors, like professional and business services, wholesale trade, manufacturing, and information, and the cyclicality of the losing sectors further points to broad economic weakness.
[High/low chart for "Tariffs' impact starting to hit employment" for Employment by sectors not impacted by tariffs and sectors impacted by tariffs is displayed]
Now, let's shift to the proverbial elephant in the room, and look at how tariffs are impacting the labor market. So the collective downward revisions to payrolls over the past few months sheds light on the broader economic backdrop, as I mentioned, particularly the somewhat disruptive, unstable influence of tariffs, and just ongoing trade uncertainty more broadly. Yes, labor market weakness now appears to predate aggressive tariff policies implemented by the Trump administration. But those policies, and ongoing uncertainty about those policies, have compounded hiring restraint.
Now, in particular, the sectors most vulnerable to trade, and those would include manufacturing, mining and logging, construction, wholesale trade, retail trade, and transportation and warehousing, they've not only had meaningful downward revisions, but job growth in those collective sectors has now descended into negative territory as you can see.
[High/low chart for "Unemployment rate inflecting higher?" for Unemployment rate is displayed]
Now, alongside the weaker reading on payrolls, the unemployment rate now sits at 4.3%, still low in an absolute sense, but the highest since 2021. As a bit of an aside, I find that the unemployment rate is often misunderstood in the context of judging the overall health of the economy and things like possible recession risk. That's why here I'm showing a very long-term picture of the unemployment rate. As a reminder, it is one of the most lagging of economic indicators, simply meaning that its rise and fall tends to follow economic inflection points. It doesn't lead them. Notice that history shows that the unemployment rate has always been relatively low in an absolute sense at the onset of recessions, and those recessions are shown by the shaded bars here. Now, they typically have inflected a bit higher from each cycle's low, but they tend to still be low at the onset of recessions. So here's the best way to think about the unemployment rate in the context of a full economic cycle. It's not the case that a high unemployment rate brings on a recession. It is the case that a recession ultimately causes the unemployment rate to rise. That's an important distinction.
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Now, another note of warning comes from the duration of unemployment. So among the unemployed, those jobless for at least 27 weeks, considered long-term unemployment, that's up significantly on a year-over-year basis, and it now accounts for nearly 26% of unemployed people. A still low unemployment rate, as I mentioned, coupled with a high share of longer term unemployment is one of the reasons why it continues to be apt to characterize the recent labor market backdrop as one of limited firings, that's good news, but also limited hirings.
[High/low chart for "Fed set to embark on easing cycle" for Implied Fed funds target rate for 9/17/2025, 10/29/2025 and 12/10/2025 is displayed]
So what does this mean for Fed policy looking into next week's Federal Open Market Committee meeting, or FOMC meeting? The combination of muted payroll growth, benchmark-driven evidence of labor market softening, not just recently, but in the past year-plus, rising long-term unemployment, and policy instability and uncertainty from tariffs, that has strengthened the case for Fed rate cuts, very likely beginning at next week's FOMC meeting.
Now, economists have widely viewed the weakened labor market data as adding urgency to the Fed's easing stance. As shown here there has indeed been a notable shift down in market-based expectations for where the Fed Funds Rate will be in the aftermath of not just the upcoming FOMC meeting, but the two after, in other words, the three remaining FOMC meetings this year.
Now, this doesn't prevent a little bit of a wrinkle from appearing with this week's release of both the Consumer and Producer Price Indexes. As we're taping this, I would say so far so good because the PPI, which was released the morning that I'm taping this, that was up but milder than what was expected. Next up, following the taping of this, we get the Consumer Price Index, or CPI, so we'll be keeping a close eye on that. As a reminder, the Fed does operate with a dual mandate, both the employment piece of it and price stability, or inflation, so stay tuned.
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Now, to wrap things up, trade policy uncertainty, a bit of turbulence, instability, appears to have exacerbated hiring caution in several key economic sectors. It does strengthen the case for the restart of an easing campaign by the Fed. However, it still leaves open questions about the overall health of the economy. Now, recession signals are not waving acutely, but given the strength of the economy in this cycle having been so supported by resilience in the labor market, any further weakening in job growth could undermine that resilience and elevate concerns about a recession. We, of course, will stay on top of that in the months to come. And thank you, as always, for tuning in.
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