Labor market jigsaw puzzle

Bottom line

Earlier this week, Senate Republicans and Democrats were unable to agree to a Continuing Resolution to extend government funding for another seven weeks until the final details for a full budget could be approved. While Republicans have a 53-47 majority, they failed with a vote of 55-45 in favor of passing the resolution, as they need a supermajority of 60 votes to pass any bill. The House of Representatives has already passed the legislation. As a result, the federal government shut down Wednesday morning, and the Bureau of Labor Statistics (BLS) was unable to release its critically important — and typically market-moving — nonfarm payroll report for September this morning.

Investors have yawned in response to this slow-moving Congressional train wreck. The S&P 500 hit a new intraday record this morning at 6,747, up 39% from its Liberation Day lows six months ago. Benchmark 10-year Treasury yields have declined to 4.1% (down from 4.6% in mid-May), and the VIX volatility index has flatlined at 16, down from a Liberation Day peak at 60.

Don’t fight the Fed Why are financial markets rallying amid this heightened labor-market uncertainty? Expectations have risen sharply that the Federal Reserve will cut interest rates again by a quarter point on October 29 and December 10, followed by more cuts in 2026, taking the fed funds rate down to 3% before year end. 

The recent weakness in the labor market was the central bank’s principal justification for cutting rates by a quarter point for the first time in nine months on September 17. Over the previous four months through August 2025, nonfarm payroll gains averaged only 27,000 jobs per month, the weakest pace of job creation since the depths of the Covid pandemic. That compares poorly with average monthly payroll gains of 123,000 over the first four months of 2025 and 168,000 during 2024. Moreover, the Labor Department’s Quarterly Census of Employment & Wages (measuring the 12-month period through the end of March 2025) revised job creation down by a record 911,000 jobs, implying a downward revision of nearly 76,000 jobs per month.

Glimmer of hope on the horizon? Taking a longer-term view, however, we believe labor market worries may be overblown. 

• August is historically the quirkiest month of the year This year was no exception, as the US added only 22,000 jobs. But with summer vacations ending, schools restarting and factories closed to retool plants, there’s a temporary flow of workers moving into and out of jobs, which typically gets fixed with revisions in September and October. Kevin Hassett, chair of the National Economic Council, predicted that nonfarm payrolls could be revised by an estimated 70,000 in coming months.
• Initial weekly jobless claims declined This high-frequency leading employment indicator spiked to a four-year high of 264,000 claims for the week ended September 5. But that was the Labor Day holiday week, and there was unemployment fraud detected in Texas. Claims declined to 232,000 for the week ended September 12 (the survey week for the September payroll report) and then declined again to a two-month low of 218,000 for the week ended September 19. This week’s claims data was suspended due to the government shutdown.
• Increased deportation of immigrants has hurt the labor market. So, we expect that President Trump could execute a policy course correction in coming months. At the highly skilled portion of the spectrum, Trump’s new $100,000 fee for H-1B visas is intended to end the exploitation of foreign technology workers, and to increase domestic hiring. At the low end, agriculture, construction and hospitality are three important industries that have been disproportionately harmed, so the administration might create carve-outs to boost legal immigration.

We did get some pieces to the labor-market puzzle this week: 

• Job Openings & Labor Turnover Survey (JOLTS) improves August job openings rose to a slightly stronger-than-expected 7.227 million, up marginally from 7.208 million in July, but still 40% below a record 12.182 million job openings in March 2022. The rate of job openings held steady at a four-month low of 4.3% in August, well below a record 7.4% in March 2022. The ratio of available openings for every unemployed worker also held steady at a four-year low at 1.0 in August, but that is still down sharply from a peak of 2.0 in March 2022. 
• Challenger, Gray & Christmas layoffs plunge Employers announced layoffs of more than 54,000 in September, down nearly 26% from a year ago and more than 37% lower than August’s 86,000. 
• ADP private payrolls fall September posted a much weaker-than-expected loss of 32,000 jobs (consensus gain of 51,000), down from a loss of 3,000 jobs in August. What happened? ADP recalibrated its data to the aforementioned BLS downward revision, resulting in a decline of 43,000 jobs compared to pre-benchmarked data. Workers who changed jobs last month saw their wages rise 6.6% year-over-year (y/y), less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest pay boost of 4.5% y/y, well below the peak of 7.8% in September 2022. 

Taking all this disparate data into account, our nonfarm payroll model here at Federated Hermes forecasts a gain of 70,000 jobs in September, well above the consensus expectation for a gain of 52,000 jobs.

Fed future In its latest Summary of Economic Projections (SEP) update in September, the Fed left its 2025 forecast for the unemployment rate (U-3) unchanged at 4.5%, higher than the actual figure of 4.3% in August 2025, which is a four-year high. By comparison, U-3 was 4.0% in January 2025 and at a 53-year cycle low of 3.4% in April 2023. The Fed also reduced its previous June forecast of 4.5% unemployment for 2026 to 4.4% in September; it lowered its 2027 estimate from 4.4% to 4.3%; and it initiated a 4.2% estimate in 2028, identical to its longer-run forecast.

Fly in the ointment? Perhaps to create some negotiating leverage with Senate Democrats, President Trump has threatened to fire many of the furloughed federal employees, estimated to result in the actual termination of around 750,000 jobs. That likely would trickle down to harm some private-sector jobs, as federal workers tighten their belts due to loss of paychecks, temporarily or permanently. 

Looking at the 34-day partial federal government shutdown in 2018-19 and the 16-day full shutdown in 2013, the Congressional Budget Office estimates that fourth quarter 2025 GDP could be hurt by perhaps 0.5%. Of course, everything depends on how long this shutdown drags on and how long investors will brush it off.

Read more about our views and positioning at Capital Markets.

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