The labor market is on a knife edge, and the factors weakening it aren’t going anywhere

Jerome Powell’s job is going to get even more complicated thanks to labor market data.
Al Drago—Bloomberg/Getty Images

* ANALYSIS: Weakening labor data—from downward payroll revisions to new job
openings falling to just 22,000 for August—has raised concerns the Fed may
soon need to prioritize a cut to interest rates to support employment over
its inflation fight. Economists told Fortune uncertainty over Trump
administration policies and AI disruption are weighing on hiring. Recent
college graduates are hardest hit. While unemployment remains stable for now,
experts warn the equilibrium is fragile, and even a modest rise in layoffs
could have wider ripple effects throughout the economy.

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
Statist ics 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.

The counterweight to the labor market’s apparent downward trajectory is the fact
that unemployment hasn’t spiked—despite the weak payroll and openings data. In
July the BLS reported [https://www.bls.gov/news.release/pdf/empsit.pdf] that
despite the minor payroll gains, America’s unemployment rate stayed around the
4.2% mark—suggesting labor supply is shrinking almost equally with demand.

It’s for this reason that recession indicators aren’t yet flashing red. The Sahm
Rule [https://fred.stlouisfed.org/series/SAHMREALTIME] (which has largely been
accurate in predicting a recession based on the unemployment rate’s three-month
moving average) in July sat at a healthy 0.10 percentage points—well off the
0.50 benchmark, which would indicate an incoming economic regression.

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 QUESTION OF CONFIDENCE

A major factor shaping the employment market is uncertainty, namely how much
decision-makers batten down the hatches against Trump-induced headwinds.

With questions over tariffs and immigration still hanging over the outlook, it’s
perhaps no surprise that when the Conference Board released its U.S. CEO
Confidence report [https://www.conference-board.org/topics/CEO-Confidence/] for
the third quarter, it confirmed 34% of CEOs expected a net reduction in their
workforce
[https://fortune.com/2025/08/04/warning-economy-interest-rate-cuts-no-growth-workers-next-5-years/] over
the next 12 months.

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.”

THE AI DISPLACEMENT ISSUE

Another question is whether, at long last, the much warned-about wave of AI job
losses is finally here. According to a St. Louis Fed FRED (Federal Reserve
Economic Data) study
[https://www.stlouisfed.org/on-the-economy/2025/aug/is-ai-contributing-unemployment-evidence-occupational-variation]
published last week: “Unlike previous technological revolutions that primarily
affected manufacturing or routine clerical work, generative AI can target
cognitive tasks performed by knowledge workers—traditionally among the most
secure employment categories.”

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 to debate.

It’s hard to place the ultimate impact of AI on the spectrum of short-term blip
to long-term upheaval. After all, for every Goldman Sachs report
[https://fortune.com/2025/03/07/artificial-intelligence-how-many-jobs-will-ai-eliminate-exposure-unemployment/]
warning of 300 million jobs lost or displaced, there’s a World Economic
Forum study [https://fortune.com/2025/04/09/ai-job-boom-not-before-the-bust/#]
saying that by 2030 AI will create 170 million new roles.

One of the authors of the FRED survey, senior economic policy advisor Serdar
Ozkan [https://www.stlouisfed.org/research/economists/ozkan], told Fortune that
AI displacement is “a surprisingly significant contributor that deserves more
attention,” but added: “Other factors are also contributing to rising
unemployment and slowing hiring, including post-pandemic monetary policy
tightening and economic policy uncertainty.”

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.

WHEN IS IT TIME TO WORRY?

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.