US labour market softens, raising hopes of interest rate cuts

Our weekly podcast by Kevin Lings

US jobs data shows an economy under pressure

In this podcast, STANLIB’s Chief Economist, Kevin Lings, explores a wide range of data on the US labour market. The statistics show that, as a result of President Trump’s tariff policies, jobs are being lost and the economy is under pressure. In response, the US Federal Reserve is expected to cut interest rates twice this year and again in 2026. Kevin also discusses whether these higher tariffs are likely to stimulate US manufacturing.

The focus areas during the week included

The S&P 500 index ended up a modest 0.3%, after declining by 0.1% in the prior week. Interestingly, US equity markets initially rose after the weaker-than-expected August labour market data was released on Friday, because it fuelled expectations of further interest rate cuts. However, the positive sentiment reversed later in the day, with the S&P 500 ending Friday down 0.3%, partly on fears that rate cuts may not be enough to boost economic growth.

The US two-year bond yield, which is sensitive to near-term changes in official interest rates, fell to its lowest level in three years (3.51%), while the 10-year yield declined to 4.09% and the US dollar weakened.

Japan’s stock markets rose, with the Nikkei 225 Index gaining 0.7% and the broader TOPIX Index up 1%. Japanese vehicle shares were boosted by the US officially implementing the trade deal with Japan that was announced in July 2025. The deal caps tariffs on most Japanese goods, including vehicles, at 15%. In exchange for lower tariffs, Japan agreed to invest $550 billion in the US (which will be channelled through President Trump) and grant US producers greater access to many of its markets, including the market for rice and other agricultural products. On Sunday, Japan’s Prime Minister Shigeru Ishiba announced he was resigning after less than a year in the role. His resignation is in response to the Liberal Democratic Party (LDP) losing its majority in both the lower and upper houses.

After the release of weaker-than-expected US employment data on Friday, the US dollar declined by 0.8% against the euro. This means that year-to-date the dollar has declined by 11.8% against the euro, which almost matches the recent low recorded on 4 July 2025. Unsurprisingly, the emerging market currency index gained 0.6% against the dollar on Friday, while the rand gained an impressive 1.3%. Year-to-date the rand is up 6.9% against the dollar.

In August 2025 US employment rose by a very modest 22 000 jobs, well below market expectations for an increase of 75 000 (Bloomberg), while the unemployment rate edged up to 4.3% from 4.2%. In addition, the previous two months’ employment data was revised down by 21 000 jobs. This means, for example, that the job gains for June 2025 that were initially reported as an increase of 147 000 jobs have now been revised down to reflect a loss of 13 000 jobs. Over the past six months the US has added an average of only 64 000 jobs a month, signalling a very noticeable softening of labour market conditions. The labour market has been hurt by the negative impact of high import tariffs and the greater use of AI in the business sector. Long-term unemployment (longer than six months unemployed) rose again in August and is now at its highest level since the Covid-induced weakness in 2021. The combination of weak job gains in August and a rising unemployment rate will ensure that the Federal Reserve (Fed) cuts interest rates by a further 25 bps when it next meets on 17 September. On Friday afternoon, futures markets tracked by the CME FedWatch tool were pricing in a 100% chance of at least a 25 bps rate cut at the next Federal Open Market Committee meeting, while the probability of a 50 bps cut rose from 0% to about 10% after Friday’s employment report.

The US ADP employment survey showed that private sector employment grew by 54 000 in August, down from the prior month’s reading of 106 000 and below estimates for a gain of 85 000. The Leisure and Hospitality sector contributed nearly all the gains, with an increase of 50 000 jobs. In contrast, employment declined in trade/transportation/utilities (-17 000) and education/health (-12 000) roughly offsetting hiring in other industries.

The US Labor Department reported that July job openings fell to the lowest level since September 2024, at 7.18 million. This means that the number of unemployed people (7.384 million) in the US exceeded the number of job openings for the first time since 2021.

US weekly jobless claims rose by 237 000 in the week, slightly above estimates for claims of 231 000. Continuing claims, which measure the total number of people receiving benefits, held steady at around 1.95 million. The jobless claims data suggests that the US labour market is softening from a position of strength, though the potential for lower interest rates and the impact of “The One Big Beautiful Bill” should help to support the economy in 2026.

The Institute for Supply Management (ISM) reported that economic activity in the US manufacturing sector contracted for the sixth consecutive month in August, although at a slower rate than in July. The ISM’s PMI was 48.7 for the month, up from July’s reading of 48 but below estimates for around 49.1. According to the ISM, “the past relationship between the Manufacturing PMI and the overall economy indicates that the August reading (48.7) corresponds to a change of plus 1.8% in real gross domestic product (GDP) on an annualised basis”. Growth in new orders, together with supplier deliveries, drove most of the month-over-month improvement, with the New Orders Index rising by 4.3 index points to 51.4. This reading for New Orders is above the 12-month moving average (48.8). Lastly, according to the ISM, “of the six largest manufacturing sectors, only two (Food, Beverage & Tobacco Products; and Computer & Electronic Products) reported increased new orders in August”.

The ISM’s Services PMI rose from 50.1 in July to 52 in August, indicating ongoing growth in the sector. The month-over-month increase was “driven by faster expansion rates for the Business Activity and New Orders indexes”, according to Steve Miller, chair of the ISM Services Business Survey Committee. Price growth moderated slightly but remained elevated across both the manufacturing and services sectors.

The US Court of Appeals for the Federal Circuit ruled that most tariffs imposed earlier this year by the Trump administration exceeded presidential authority in terms of the International Emergency Economic Powers Act of 1977. However, the implementation of the decision will be delayed until October to allow the administration to appeal to the US Supreme Court. Tariffs on foreign steel, aluminum and vehicles were introduced under separate trade acts so they are not affected by this ruling. While this development introduces some additional tariff uncertainty, the Trump administration has appealed to the US Supreme Court and requested an expedited ruling. The administration could also levy tariffs under alternative legal authorities, such as section 232 of the Trade Expansion Act of 1962 or the Trade Act of 1974. However, other acts generally require investigations to be conducted by the Executive branch departments, which will take time to complete, and tariff rates and terms may be limited in some cases.

Headline inflation in the Eurozone increased slightly in August, from 2% to 2.1%. The increase was in line with market expectations. In addition, core inflation was stable at 2.3%, also in line with expectations. Services price inflation, which has been the main area of focus in the inflation data for some time, slowed to 3.1% from 3.2% in July. Comments by European Central Bank (ECB) policymakers in the week mainly reinforced the view that interest rates would remain unchanged in September and for some time after that. Most economists polled by Reuters and Bloomberg think that the ECB has reached the end of its policy easing cycle.

Bank of England (BoE) Governor Andrew Bailey warned at a hearing before a Parliamentary committee that there was “considerably more doubt” about further reductions in interest rates. He said that the risks of inflation going up had risen and that he was “more concerned” about labour market weakness. At the same meeting, Deputy Governor Clare Lombardelli said that the key interest rate may need to settle only slightly below the current level of 4% due to persistent price pressures.

In Japan, nominal wages grew by 4.1% y/y in July, well ahead of market expectations for an increase of 3% and also above June’s reading of 3.1% y/y. This means that real wage growth turned positive for the first time this year. Bank of Japan (BoJ) Deputy Governor Ryozo Himino continued to assert that the central bank will raise interest rates if prices and the economy develop in line with its forecasts. An increasing number of economists expects the BoJ will raise interest rates again in October 2025.