Why Weak US Payrolls Could Have Been Weaker

• Nonfarm payrolls have ground to a halt after another soft print  

• A sudden turn in SA factors sans explanation prevented a loss of 100k

• Hours worked signal a stumbling economy into Q3

• Fed to cut 25bps, but may be more likely to work the dots than upsize

• This is the cost of broad policy uncertainty

• US nonfarm payrolls, m/m 000s // UR %, SA, August:
• Actual: 22 / 4.3
• Scotia: 0.0 / 4.1
• Consensus: 75 / 4.3
• Prior: 79 / 4.2 (revised from 73 / 4.2)

The US job market is definitely weakening below most estimates of lowered breakeven rates in light of tighter immigration policy. When paired with Chair Powell’s pivot at Jackson Hole, the result cements a rate cut on the 17th. The residual questions are how big and/or how frequent.

First, the results. Payrolls were up by only 22k (107k in four months) and very close to Scotia’s below consensus estimate within very noisy bands. It’s the fourth month in a row for weak payrolls (chart 1). The reasons were somewhat mixed in terms of the data drivers. In my opinion, they are less mixed in terms of the broad macro forces — uncertainty is clearly taking its toll and so are the effects of policies like tariffs and draconian immigration curbs. Own it! 

Chart 2 shows the change by sector. There were pluses led by education and health as well as leisure and hospitality sectors. Who knows, maybe the first benefits from visa-inducements and the second from tax-free tip money! But the offsets were diverse with weakness spread across multiple other sectors.

The month-over-month change in seasonally unadjusted payrolls was broadly in line with my concern that it would be on the weaker side (chart 3). 

What was not was the sudden increase in the August seasonal adjustment factor (chart 4). A sharp downward trend over multiple years suddenly gave way to a higher SA factor this August. Why? We’ll be left to question how unfiltered the statistical methods truly were, versus any other rationale for suddenly messing with the SA factors. Were the knees-a-knockin’ at the BLS?

This matters because the number would have been even worse had the prior pattern of softening August SA factors held. The far right bar in chart 5 is what would have happened to payrolls this morning without suddenly doing an about face on SA factors. It saved markets from a sharp drop of around 100k.

Federal government jobs fell by 15k (chart 6) with state and local governments little changed (-1k). The bigger shoe to drop arrives in October when DOGE layoff packages expire and hundreds of thousands drop off payrolls unless they find jobs elsewhere.

Wages were warm again (chart 7). Hours worked are signalling a warning sign for the US economy (chart 8). They were higher by 0.3% m/m SA in August, but the third quarter overall is tracking a drop of –0.5% q/q SAAR. Since GDP is an identity defined as hours times labour productivity, the US would need a solid acceleration of productivity and activity readings to keep GDP growth in the black.

The unemployment rate edged higher to 4.3%. It’s still a fairly tight job market generating above-inflation wage pressures. The UR comes from the household survey which registered a gain of 288k jobs that wasn’t a surprise. It also registered what I thought was a surprising 436k surge in the labour force that I hadn’t expected. That’s the strongest gain in the labour force since April. I don’t have a great explanation as to why as immigration curbs have kicked in, so it’s either driven by the high noise in the survey or large re-entry into the workforce by folks already in the country and not hiding from ICE. Nevertheless, the increase does little to arrest the downward trend in the participation rate (chart 9).

In any event, data quality is low but whether that means upside or downside risk in future revisions is unclear. The first-pass collection rate was very low.

So what does it all mean for the Fed? Who cares about next week’s CPI. Chair Powell had already pivoted more toward concern about the job market in his Jackson Hole speech while dismissing inflation risk as transitory. That’s debatable over time, but these numbers will spook him. A quarter point cut is more likely than 50bps in my view, but the upsized risk can’t be ignored. I think the Committee may favour working the bias in the dot plot more aggressively than upsizing on the first pass and having markets push them toward subsequent upsizing. 25–25–25 into year-end may well be the signal and then we’ll start the tracking and changes for the refreshed 2026 dot plot. But don’t blame Powell. It’s the rest of the policy mixture that is the problem and Powell risks emboldening the administration’s policies if he goes too far by coming to the rescue.