The hope that June marked the bottom of the labor market is now in serious doubt.
Fresh data from ADP, Revelio Labs and Challenger, Gray & Christmas all point to the prospect that weakness in labor demand is becoming entrenched and is not temporary.
Over the past three months, the ADP survey has shown that job gains averaged just 3,000 a month—a sharp deceleration that points to a cooling employment engine.
The Revelio Labs survey for October showed a decline of 9,100 jobs, a result that was complemented by the Challenger survey’s finding of 153,074 announced job cuts for the same month.
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In our estimation, the labor hoarding that has characterized the American jobs market over the past few years has ended.
With businesses investing prodigious sums of capital into productivity-enhancing technology, one should anticipate that firms of all sizes, and large businesses in particular, are poised to shed labor.
As the focus among businesses now turns to efficiencies and increasing productivity, we expect layoffs to increase, causing unemployment to rise.
With official government data delayed by the shutdown, private indicators like the Indeed Job Posting Index offer a troubling picture. The index fell to its lowest level since the pandemic, suggesting that job vacancies have collapsed as hiring remains tepid.
Trade tensions, higher costs and the acceleration of AI-driven restructuring have all contributed to this downturn.
The once “low-hire, low-fire” labor market is showing signs of shifting toward “low-hire, more-fire.”
Seven months after sweeping tariffs were announced, the effects of import duties and trade disruptions are still rippling through industries. The weakness in hiring highlights that these are not one-off shocks but instead are part of a broader slowdown in labor demand.
What’s next
The stock market’s rally may be masking the underlying softness in the real economy. AI investment—the driving force behind rising equity valuations—is also displacing workers and dampening labor demand.
Based on our estimates, the job opening rate could fall to around 4.1%, implying that the unemployment rate may soon reach 4.4% or higher, according to the Beveridge curve.
While a 4.4% unemployment rate doesn’t spell crisis, it reflects a labor market losing momentum at a time when inflation remains stubbornly above 3%.
In addition, as official data becomes available once the federal government reopens, we would not be surprised to see a move to 4.7% in the unemployment rate—because of the shutdown itself—before retreating back toward 4.5%.
We think the Federal Reserve was right to get ahead of the slowdown with two rate cuts over the past two months.
But with limited tools at its disposal, the Fed may not be able to offset weaknesses stemming from structural issues like AI adoption or restrictive immigration policies—factors that create structural, not cyclical, unemployment.
For a blanket policy tool like interest rate cuts, the Fed might have to lower rates even further to counter those pressures, risking higher inflation.
By early next year, the economy could face a scenario where inflation stays above 3% and unemployment rises to 4.5% or higher, leaving growth stagnant amid a weakening labor market.
Of the four models we run to estimate the optimal interest rate for the American economy, none suggests that another interest rate cut is necessary.
In addition, given the relative lack of alternative inflation and pricing data—alternative labor market data is more plentiful—we think the prudent policy step would be to hold off on any prospective rate cut until we get the official inflation and employment data that is up to date.
The takeaway
The U.S. labor market appears to be losing steam faster than expected, with demand for workers hitting post-pandemic lows.
AI, trade frictions and a slowing global economy are converging to reshape hiring dynamics in ways that rate cuts alone may not fix.
The Fed is not well positioned to address, much less fix, the structural dynamics that are causing hiring to slow. That is a function of fiscal policy, which right now remains a mess with the administration focused on trade and immigration.
While a mild uptick in unemployment could help cool inflation, the broader picture points to a fragile balance ahead. Policymakers face a difficult year-end—navigating a soft labor market without reigniting price pressures.
