Labor Market Cooling: What Investors Need to Know

As an investment advisory firm, we are always keeping a close eye on economic indicators that can impact your portfolio. The latest labor market data, hot off the press from August 2025, paints a sobering picture that demands our attention. Federal Reserve Chair Jerome Powell’s recent focus on the labor side of the Fed’s dual mandate—price stability and maximum employment—has been validated by this data. Let’s break down the key takeaways, what they mean for markets, and how you can position your investments in this environment.

The Big Picture: A Cooling Labor Market

The August jobs report was a stark reminder that the labor market is losing steam. Nonfarm payrolls added just 22,000 jobs, missing the consensus estimate of 75,000 by a wide margin. Private payrolls weren’t much better, growing by only 38,000 against the same 75,000 expectation. Revisions to prior months shaved off 21,000 jobs, pushing June into negative territory with a loss of 13,000 jobs—the first outright contraction since December 2020.

The three-month average for both total and private payrolls growth is now a meager 29,000, signaling a significant slowdown. Nominal aggregate incomes are growing at a sluggish 2.4% annualized pace over the past three months, with flat hours worked and a modest 0.3% rise in average hourly earnings. This anemic income growth points to weaker consumer spending power, which could ripple through the economy.

The Household Survey offered a slightly brighter note, with the labor force growing after three months of contraction and employment rising by 288,000. However, this follows a 260,000 drop in July, so the net gain is less impressive. Labor force participation and prime-age employment rates ticked up, but the headline U-3 unemployment rate climbed to a new cycle high of 4.32%, up nearly 8 basis points. The broader U-6 underemployment rate, which includes part-time and marginally attached workers, jumped 20 basis points to 8.1%, also a cycle high.

Digging Deeper: Warning Signs Abound

The data reveals a labor market stuck in stasis, with mounting signs of deterioration. Job creation is narrowing, driven almost entirely by acyclical sectors like healthcare and social assistance. Cyclical sectors—manufacturing, construction, and trucking—are shedding jobs, losing an average of 14,000 jobs per month over the past three months. Construction employment alone fell by 7,000 in August, and with homebuilding activity slowing, further declines are likely.

Other red flags are piling up:

• Native-born and college-educated unemployment rates are near cycle highs.

• The Conference Board’s labor market differential hit a new cycle low, reflecting worsening perceptions of job availability.

• NFIB respondents increasingly cite poor sales as their top concern, hitting a cycle high.

• A growing number of workers report zero wage growth, and those not in the labor force but wanting to work have surged to new cycle highs.

• JOLTS job openings dropped to their second-lowest level since 2021, with the ratio of openings to unemployed workers falling below 1 for the first time since early 2021.

• Healthcare job openings, a key driver of payroll growth, plummeted to their lowest since 2020, and hours worked in the sector hit a record low.

These trends suggest that the unemployment rate may be understating the true extent of labor market slack. Layoffs, while still low, are creeping higher, and quit rates in construction have crashed to 2009 levels. The ISM manufacturing PMI’s employment index remains in contraction, and the Beige Book reported stagnant activity and employment levels in August.

What’s Driving This? Not Just Immigration

Some have pointed to immigration dynamics to explain the labor market’s struggles, but the August data shows little evidence of this. The native-born unemployment rate, college-educated unemployment, and other metrics are deteriorating independently of immigration effects. The labor market’s challenges are rooted in softening demand and a buildup of slack, not just supply-side factors.

The Fed’s Response: A September Cut Is Certain

The Federal Reserve is paying close attention. A rate cut at the September FOMC meeting is a done deal, with even hawkish members aligning with the need for easing. The debate now centers on the size of the cut—25 or 50 basis points. While doves may push for a larger 50-basis-point cut given the labor market’s trajectory, hawks, still focused on inflation, may resist. However, the data suggests a more aggressive response is warranted. Governor Waller has warned of a potential “non-linear deterioration” in the labor market, and Powell appears to be taking this seriously.

The market-implied terminal rate—the expected endpoint of the Fed’s policy rate—has been trending lower, reflecting growing concerns about economic weakness. This isn’t the benign cooling we saw last year, driven by labor supply improvements. Instead, it’s a more concerning demand-driven slowdown, increasing the risk of a sharper economic downturn.

Implications for Investors

Equity markets have been resilient, interpreting weak data as a signal for more rate cuts, which historically support risk assets. However, this time feels different. Last year’s proactive cuts supported markets as the labor market cooled gradually. This year’s cuts appear more reactive, responding to mounting downside risks. Reactive cuts are less bullish for equities, especially if economic weakness accelerates.

That said, the “Powell Put”—the Fed’s commitment to support the labor market—remains in play. Any significant market weakness is likely to be shallow and short-lived, as the Fed prioritizes employment. This creates opportunities for investors to lean into equities, particularly cyclical and growth stocks, during periods of weakness. Start preparing your shopping list for potential dips.

Looking Ahead: Benchmark Revisions and Beyond

On Tuesday, we’ll get the preliminary benchmark revisions for the Establishment Survey, which adjust employment estimates based on state unemployment insurance data for the year ending March 2025. Last year’s revisions were negative, and many expect the same this time. However, these revisions won’t tell us much we don’t already know. The labor market is cooling, payroll growth is slowing, and slack is building. The revisions are backward-looking and won’t change the forward-looking risks.

Positioning Your Portfolio

As an investment advisor, my advice is to stay vigilant but not overly bearish. The labor market’s slowdown increases the likelihood of rate cuts, which can support equities in the short term. However, the risk of a “growth startle”—a sudden market reaction to worsening economic data—is rising. Here’s how to position your portfolio:

• Stay diversified: Balance exposure to cyclical sectors (e.g., industrials, materials) with defensive sectors (e.g., healthcare, utilities).

• Monitor opportunities: Be ready to buy into market dips, particularly in growth and cyclical stocks, as the Fed’s labor-focused policy should limit downside.

• Watch for tariff impacts: Rising tariffs could pressure inflation and corporate margins, further weakening labor demand. Keep an eye on consumer staples and discretionary sectors.

• Income focus: With nominal income growth slowing, prioritize investments with stable cash flows, such as dividend-paying stocks or high-quality bonds.

Final Thoughts

The August jobs report confirms that the labor market is cooling, with mounting risks of a sharper slowdown. While the Fed is poised to act, the nature of this easing cycle—reactive rather than proactive—suggests a bumpier road for risk assets. However, the Powell Put provides a safety net, making significant downturns a potential buying opportunity. Stay informed, stay diversified, and be ready to act when the market presents opportunities. As always, we are here to help you navigate these shifts and keep your financial goals on track.

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About Rigden Capital Strategies

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Disclaimer: This post is for educational purposes only and is not intended as tax or investment advice. Investors should consult with a qualified financial planner or tax professional before making decisions about retirement accounts and real estate.