Just 22,000 jobs

The US economy added just 22,000 non-farm jobs in August, and the unemployment rate rose to 4.3 per cent. The report ended any lingering hope that growth was picking up again.

The revisions made it worse. June's figure was cut to a small net loss, the first monthly decline in payrolls since the end of 2020, and the unemployment rate is now the highest since 2021. Coming after July's weak report and its large downward revisions to earlier months, August's number completes a summer in which hiring has all but stopped.

Fewer workers arriving

Economists going through the figures pointed to a factor that has had too little attention. The crackdown on crossings at the southern border and new administrative limits on foreign work visas have sharply slowed growth in the civilian labour force. Slower growth in labour supply stops the unemployment rate from jumping, for now. But it also holds down potential payroll growth and limits how much the economy as a whole can produce.

The mechanism is simple arithmetic. The unemployment rate rises only when the number of people looking for work grows faster than the number of jobs. For most of the past three years, immigration added hundreds of thousands of job-seekers a year, so payrolls had to grow briskly just to keep the rate steady. With far fewer arrivals, a much smaller monthly gain can hold unemployment flat, and weak payroll numbers alone overstate how much slack is building.

Why the rise still matters

That argument cuts less than it seems. If supply alone were slowing, payrolls would be low but the unemployment rate would hold steady. Instead it has risen, which means demand for workers is falling faster than the supply of them. The immigration story explains why the damage looks modest; it does not explain the damage away.

Other parts of the report point the same way. Job gains are concentrated in health care, which responds to demographics rather than the business cycle, while manufacturing and the federal government have been shedding workers. The share of the unemployed who have been out of work for six months or more has been creeping up, the usual sign of a market in which people can find no openings rather than one in which they are between jobs.

The case for cutting now

At 22,000, job creation is running far below the roughly 100,000 a month needed to absorb normal population growth. The Federal Reserve now has clear evidence that tight policy has done its job, and then some.

The Fed has held its benchmark rate at 4.25 to 4.5 per cent since December, arguing that tariffs posed an inflation risk that justified patience. At Jackson Hole in August Jerome Powell shifted the emphasis, saying the balance of risks was moving towards employment. Two governors, Christopher Waller and Michelle Bowman, had already dissented in favour of a cut in July. After this report, futures markets treat a cut at the meeting on 16 and 17 September as all but certain; the debate is over its size.

Precedent argues for a larger first move when the labour market turns. In September 2007 a surprise fall in the August payroll count helped persuade the Fed to cut by half a point at its next meeting rather than the quarter-point many had expected. Waiting for unemployment to rise decisively has historically meant cutting after a recession is under way, because the unemployment rate tends to rise slowly at first and then quickly.

The inflation objection

The strongest case against rapid cuts is that inflation remains above the Fed's 2 per cent target and tariffs are still passing through to prices. Core inflation has shown signs of picking up in goods, and a central bank that eases while prices are rising risks losing credibility on its other mandate. The hawks on the committee will point out that a labour shortage created by lower immigration is a supply shock, which lower rates cannot fix.

That objection deserves weight, but it points to the pace of cuts rather than their direction. Tariffs raise the price level once; they become lasting inflation only if wages chase prices, and a market adding 22,000 jobs a month gives workers little power to demand compensation. A policy rate well above most estimates of neutral leaves room to ease without becoming stimulative.

Winners from a faster Fed

Short-dated Treasuries are the obvious beneficiary: two-year yields track expected policy rates closely, and a faster easing cycle pulls them down. Floating-rate borrowers, from small businesses to households with credit-card debt, would feel relief within weeks. The dollar would likely soften as the gap between American and foreign rates narrows. Savers in money-market funds would lose, as yields on cash fall with each cut.

Housing is the sector with most to gain and the least certainty of getting it. Mortgage rates follow the ten-year Treasury yield rather than the Fed's overnight rate, and they have already eased to around their lowest level in a year as bond markets anticipated weaker growth. Further relief depends on long yields falling too, which is not guaranteed if investors worry that a Fed under political pressure will tolerate higher inflation. Builders and estate agents may find that cheaper overnight money does less for them than hoped.

The committee that decides may also look different by the time it meets. The Senate is expected to vote on Stephen Miran, the president's nominee for the vacant seat on the board, before the September meeting. He has argued for substantially lower rates, and his arrival would add a third voice for easing among the governors.

The picture beyond the next meeting depends on data that may yet change the view. The preliminary benchmark revision to payrolls, published on 9 September, is expected to show that job growth in the year to March was weaker than first reported. Consumer price figures for August arrive just before the Fed meets. A strong inflation print would narrow the case for a half-point move; a large downward benchmark revision would widen it. With payrolls growing by only 22,000, the Fed has run out of reasons to wait, and it will probably cut rates promptly and by more than it had planned.