The U.S. labor market enters a "stalling moment"! Will another 800,000 jobs be revised downward next week?

If market forecasts for moderate U.S. employment growth in August and an increase in the unemployment rate to 4.3% prove accurate, it would confirm labor market weakness and all but guarantee a Federal Reserve rate cut this month.

The highly anticipated jobs report from the U.S. Department of Labor, due Friday, comes after news this week that the number of unemployed in July exceeded job openings for the first time since the COVID-19 pandemic.

For now, U.S. employment growth appears to have entered a "stall" phase, with economists attributing this to President Trump’s sweeping import tariffs and immigration crackdowns that have reduced the labor supply. The weakness in the labor market is mainly coming from the hiring side.

Trump’s tariffs have pushed the average U.S. tariff rate to its highest level since 1934, sparking market concerns about inflation and prompting the Federal Reserve to pause its rate-cutting cycle.

Just as some uncertainty around trade policy began to dissipate with most tariffs now in place, a U.S. appeals court ruled that most of the Trump administration’s tariffs were illegal, leaving businesses in a state of ongoing flux.

Ron Hetrick, Senior Labor Economist at Lightcast, said, “Uncertainty is a killer for the labor market. We have many companies pausing (hiring) because of tariffs and pausing because of uncertain Fed actions.”

Economists expect that nonfarm payrolls increased by 75,000 last month, compared to a 73,000 increase in July. Economists say, given the reduced labor supply, these levels of job growth are more realistic. Estimates range from no new jobs to the creation of 144,000 positions.

Revisions to June and July employment figures will be closely watched. Earlier, May and June jobs data were revised down by a total of 258,000, which angered Trump last month. Trump used this as grounds to fire Bureau of Labor Statistics Director Erika McEntarfer, accusing her of fabricating employment data.

Economists have defended McEntarfer, attributing the revisions to the “birth-death” model, which the Bureau of Labor Statistics uses to estimate the number of jobs added or lost due to company openings or closures in a given month.

Ernie Tedeschi, Economic Director at Yale’s Budget Lab, said, “We are in a low-churn labor market, with not a lot of hiring or firing happening. So the job growth we see in the economy is mainly driven by the net birth of new companies, but that happens to be the part of the data that is most interpolated. It is most sensitive to revisions because it is explicitly modeled by the Bureau of Labor Statistics, not something they can directly survey.”

In the second quarter, the U.S. added an average of 35,000 jobs per month, compared to 123,000 during the same period in 2024.

Another 800,000 Downward Revision?

When the Bureau of Labor Statistics releases its preliminary revision estimate for employment levels for the 12 months ending in March next Tuesday, slow job growth is likely to be confirmed.

Based on existing Quarterly Census of Employment and Wages (QCEW) data, economists estimate that employment levels could be revised down by as much as 800,000. QCEW data is sourced from employer reports to state unemployment insurance programs.

Trump has nominated E.J. Antoni, Chief Economist at the conservative think tank Heritage Foundation, to lead the Bureau of Labor Statistics. Antoni has written opinion pieces critical of the bureau and even suggested suspending the release of monthly jobs reports. He is viewed by economists across the political spectrum as an unqualified candidate.

Tedeschi said, “Trust in these numbers will depend on whether this director is seen as nonpartisan and as someone who values the independence of the Bureau of Labor Statistics and wants to publish the absolute truth, rather than respond to political pressure.”

In the second quarter, the U.S. lost 800,000 workers, attributed to immigration raids and the termination of temporary legal status for hundreds of thousands of immigrants. The shrinking labor reserve not only dampened job growth but also prevented a sharp rise in the unemployment rate. The unemployment rate is expected to have risen from 4.2% in July.

Economists estimate that the economy needs to create 50,000 to 75,000 jobs per month to keep up with the growth of the working-age population.

Federal Reserve Chair Powell hinted last month that the Fed might cut rates in September, acknowledging that labor market risks are rising, but also adding that inflation remains a threat. Since December last year, the Fed has kept its benchmark overnight rate in the 4.25%-4.50% range.

New jobs may still be concentrated in healthcare and social assistance industries. But warning signs are flashing: government data on Wednesday showed that job openings in this sector fell for the second consecutive month in July.

A strike by 3,200 Boeing workers could weaken manufacturing employment, a sector already under pressure from tariffs. Federal government jobs are expected to decline further amid White House spending cuts.

Citigroup economist Veronica Clark said, “We are seeing increasing evidence that labor demand weakened further in August, and markets and Fed officials are underestimating this year’s layoff risks.”