Job market’s effect on the economy

In September, the U.S. economy added 119,000 jobs, surpassing economists’ expectations. The U.S. Bureau of Labor Statistics (BLS) released this report nearly seven weeks late because of the government shutdown. The unemployment rate climbed to 4.4% in September, up from 4.3% in August. Although consumer spending remains strong, recent downward job growth revisions reveal a softening labor market. During the third quarter, payrolls grew by an average of 62,000 jobs per month, a sharp drop from last year’s third-quarter average of 133,000 new jobs monthly.¹ The BLS plans to release its next report on December 16, which will include November payrolls and unemployment, but bypass October unemployment due to ongoing data collection challenges stemming from the shutdown.

Investors believe this softer labor market will lead to more Federal Reserve (Fed) interest rate cuts. The Fed reduced rates twice so far this year with 0.25% cuts at their September and October meetings, bringing their target interest rate range to 3.75% to 4.00%. Market odds of a rate cut in December rose to 40% in the wake of the employment report. Interest rate markets also indicate high odds of three more cuts in 2026. ²

Still low unemployment rate

The unemployment rate remains low by historical standards. Twice a year, the BLS revises nonfarm employment estimates; recently, it reduced the 12-month period ending March 2025 by an average of 67,000 jobs per month, suggesting labor market weakness began in early 2024.² While slowing job growth is just one indicator, solid corporate earnings, trade deals and likely Fed rate cuts contribute to our glass half-full outlook.

Job openings declined slightly over the past year but remain high at 7.2 million.³ “Companies are searching for people but seem to have difficulty finding the right candidates,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “Businesses are hanging onto existing employees while looking for more of them.” The BLS reports that about 7.6 million Americans are looking for work, roughly matching the number of open positions.¹

The labor force participation rate, another key metric, rose by 0.1% to 62.4% in September, still below the recent high of 62.8% in November 2023.⁴ “Shrinking labor force participation is a negative sign and aligns with an aging workforce,” says Haworth. “But less available labor has not translated to higher labor costs.” Average hourly earnings increased 3.8% year-over-year in September, slightly below last year’s pace.¹

Early signals to watch – jobless claims and WARN notices

Weekly initial jobless claims provide a “real-time” labor market measure. According Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, “Initial jobless claims remain low and consistent with seasonal norms, signaling that employers are not actively cutting staff. When combined with recent payroll figures, this suggests we’re in a ‘slow hiring, slow firing’ environment.”

Federal Reserve reaction

Investors closely watch job data as a key economic indicator and a Fed monetary policy signal. The Fed manages interest rates through the federal funds target rate, which influences lending and consumer financing rates on mortgages, automobile loans and credit cards. The policy rate and investor expectations about its future path also strongly influence bond yields. In late 2024, as jobless claims and unemployment rose, the Fed cut its target rate by 1%, to a range of 4.25% to 4.50%. Renewed Fed concerns about a weaker job market led to cuts in September and October to a target rate of 3.75% to 4.00%.  

Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group, expects more rate cuts ahead. “Worries around elevated inflation have kept interest rates elevated,” says Hainlin. “However, recent data clearly indicates a softening labor market, increasing the odds of multiple rate cuts through 2026.”

What to expect

Looking ahead, evolving U.S. tariff policy adds economic uncertainty, although the U.S. economy has proven dynamic. Effective tariff rates (tariff revenue divided by the value of imported goods) approach 12%, up from 2-3% in recent years before April tariff announcements. Investors also monitor the effects of stricter immigration policies proposed by the Trump administration. “People subject to deportation, in many cases, have jobs, so if they leave, other workers will need to step into those jobs,” says Haworth. He highlights the construction industry, which relies heavily on foreign-born workers, as a sector that may face tighter labor conditions. Inflation also plays an important role in Federal Reserve decisions. Rising import cost pressures prompt businesses to pass higher import costs onto consumers to a greater degree. We continue to monitor consumer spending, labor markets, inflation and policy as we look ahead to 2026.

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