The labor market looks broken – are there any solutions that go beyond slowing down?
“The job market has been completed and bankrupt.” Chris Rupkey, chief economist at FWDBONDS, described the August Job Report released today (September 5). Unemployment has risen to its highest levels since 2021, exacerbating fears that the United States may fall into a realistic recession.
The U.S. economy added just 22,000 jobs in August, far below the expected 75,000 jobs. The Bureau of Labor Statistics also revised its June data, showing staggering losses in 13,000 jobs. In total, the economy has added only 29,000 jobs in the past three months.
The wage losses in August are particularly severe in professional and commercial services, federal government and wholesale trade. But there are obvious weaknesses in each department. “There has also been a constant loss in manufacturing, construction and mining in recent months, suggesting that Trump’s blue-collar Renaissance has obviously not happened,” Elise Gould, a senior economist at the Institute for Economic Policy, posted on the Blues.
Analysts now widely hope that the Fed will lower interest rates by 25 basis points at its Sept. 17 meeting and may further reduce them in October and November. The pace of these cuts will depend on the August inflation rate that expires on September 11.
Oliver Allen, senior economist at Pantheon macroeconomics, warns that the risk of layoffs is rising as employers lose confidence in their economic views. “So far, employers have not hired or shot too much, but there is a risk of layoffs that could increase, which suggests a significant slowdown,” Allen told Observer. He estimates GDP growth rate this year is 1.7%, down from 2.8% in 2023. To prevent a deeper slowdown, he said the Fed must lower interest rates and President Trump should reduce tariffs and immigration policies that limit labor supply.
If the job market deteriorates drastically, Allen added: “The government cannot do it right away, any policy changes will take time to pass, as we have seen in the big beauty bill.”
German style restoration?
Allen suggested one option would be to adopt something similar to Germany’s Kurzarbeit program, which subsidizes wages to help employers retain workers. But he noted that such a “social market economic agenda” is unlikely to attract the Trump administration, which may tend toward unemployment insurance rather than wage subsidies.
Michael Englund, chief economist at Action Economics, said the U.S. labor market will have to weaken more before Washington considers European-style subsidies or plans for another pandemic-era pandemic, such as the Paycheck Protection Program.
“So far, we haven’t seen enough evidence that the job market is a signal recession,” Englund told Observer. “Weekly unemployment claims have been moving sideways, and retail and household incomes are still large, supporting our soft ground situation.”
Englund also downplayed concerns about tariffs. “Tariff Bravado continues to look more like a negotiation strategy, and [the administration] “Agreements have been being reached with different countries. Tariffs will bring in billions of dollars in revenue, which will fund large and beautiful bill tax cuts, so the net impact on inflation will be zero,” he said.
