• The employment market has screeched to a halt, with the jobless rate touching year-to-date highs and Continuing Claims rising

• Stocks remain near all-time highs ahead of what’s expected to be a Fed rate cut

• Macro investors face risks, including those from abroad, and we outline how to play it all heading into year-end

The jobs market faces increasing downside risks. That was the upshot from Federal Reserve Chairman Jerome Powell’s Jackson Hole speech last month. He described the US labor situation as being in a “curious” kind of balance that resulted from a marked slowdown in both the supply and demand for workers. Rising unemployment, cooling wage gains, and a steep deceleration in the pace of monthly job growth—these are sobering descriptors of the current situation. And guess what happened? Stocks soared.

Traders took the Jackson Hole missive as a cue to buy the most interest-rate-sensitive stocks, namely domestic small caps, regional banks, and even shares of asset-heavy retailers. By August’s end, the Russell 2000 Index of small caps scored its best month of the year, rising 6% and handily beating the S&P 500. To its credit, the SPX rose above 6500 for the first time on the penultimate trading session of the month.

All of that jubilant price action came ahead of what’s often a spooky month. According to data from Bank of America Global Research, September is notoriously weak. The average S&P 500 return in data going back to 1927 is -1.17%, with a negative return a majority of the time. Specifically, the month’s opening stretch usually features a bevy of jobs market barometers, and that’s what we face right now.

September Often Delivers Volatility

Source: BofA Global Research

As investors return from their Labor Day holiday, let’s examine the current state of the employment situation. It’s clear that it has deteriorated throughout this year, but the turn for the worse began long before the calendar flipped to 2025. We now encounter the real chance that a negative monthly payrolls print could occur today through Q4. Of course, predicting economic data is hard enough, while accurately forecasting how stocks, bonds, commodities, and currencies will respond is a whole other challenge. 

So, let’s assess the landscape, lay out the risks, and discuss why some bad economic data might actually result in some good stock market returns.

Setting the Scene: Key Dates and Macro Expectations

Friday, September 5: Let’s not bury the lead. This Friday’s August payrolls report is big-league. The data to be released at 8:30 a.m. ET by the Bureau of Labor Statistics (BLS) (which is now under new leadership) could determine the Fed’s next move. Recall that on the first of last month, the July jobs data was dreadful. 

The headline employment rise of 73,000 was sharply below economists’ expectations, but that wasn’t the focus. Rather, 258,000 positions were erased from the books between May and June—one of the biggest two-month downward revisions in history.

Revisionist History

Source: Bloomberg

Experts often inspect the three-month average pace of job growth. That figure ground to a virtual halt at just 35,000 as of July. Now, if you only looked at the headline employment gain and the jobless rate, you might have concluded that the labor market was “good, not great.” 

That would be peering at the assemblage of data through rose-tinted glasses. For quarters on end, so-called “non-cyclical” sectors have been driving the labor market’s growth. Areas like manufacturing, technology, and financial services have taken a backseat to government job gains, a bloated education system, and steady increases in healthcare employment.

This Friday’s report could be either a confirmation of the July disappointment or a signal that an upswing is already underway. Consider that although July’s 73,000 jobs gain was low, it was a three-month high, given the revisions to the previous two months. 

US Unemployment Rate and Monthly Job Growth

Source: BLS

Wednesday, September 17: A dozen days after the August nonfarm payrolls report comes the next Fed interest rate decision. The Federal Open Market Committee (FOMC) gathers fresh off its annual Jackson Hole excursion, and the bond market expects a rate cut. 

Odds have recently ranged from 80% to 95% that Chair Powell will make good on his intimation from Jackson Hole. Moreover, Fed governor Chris Waller, seen as a potential successor to Powell, was vindicated for his stance that the central bank’s monetary policy committee should focus more on the labor market’s downside risks rather than the limited-duration impact of President Trump’s tariffs.

Waller was joined by a fellow Federal Reserve Board of Governors member, Miki Bowman, in dissenting at the FOMC’s July meeting. The 9-2 vote resulted in no change to the Fed Funds target rate back then; we think that changes this go-round. There’s a reasonable likelihood that the chair of the Council of Economic Advisers, Stephen Miran, will cast an interest rate ballot later this month, though the US Senate will have the final say on that. (The president tapped Miran to replace former Fed governor Adriana Kugler, who unexpectedly resigned from her post in early August.)

The Market Expects 2.2 Quarter-Point Rate Cuts Through Year-End

Source: Augur Infinity

US Labor Market: Deep Dive Into the Key Reports

We can’t view the employment situation in a silo. The entire macroeconomic chessboard must be analyzed and gamed out when exploring trends in the pace of monthly job growth, the unemployment rate, the labor force participation rate, alternative data measures, and even global developments. That’s how macro experts think. That’s how they go about data analysis. Let’s do that.

This week, we indeed get a plethora of points that, when taken together, form a macro mosaic. 

1. PMI Employment Readings

This past Tuesday morning featured the first labor market breadcrumbs. Two companies, S&P Global and the Institute for Supply Management (ISM), publish their own surveys of business managers. The nationwide questionnaires reveal the views of companies, both big and small, on economic conditions, including employment. 

The surveys have taken different directions. The S&P Global Flash PMIs for August, released on the 21st of last month, reported an acceleration in growth and hiring. As for the ISM’s PMI, employment trends are more sluggish, generally holding below the 50 level (the demarcation between growth and contraction). Tuesday’s surveys were for the manufacturing sector only; Thursday’s reports will be for services.

S&P Global August Flash PMI: Improved Employment Trends

Source: S&P Global

2. JOLTS

Next on the docket this week is the Job Openings and Labor Turnover Survey (JOLTS). Always two months in arrears, it only gives a dated look at the trend of open positions and pace of firings and quits. The story has been the same as most other employment data, which is down and to the right in terms of overall strength since early 2022. 

The good news is that the number of job openings has steadied itself over the past 12 months. Our team has come to describe it as the “slow to hire, slow to fire” labor market.

JOLTS Job Openings and Indeed Postings Down From the 2022 Peak

Source: Augur Infinity

3. Challenger Job Cuts

Perhaps the rising star within the agglomeration of employment data is the monthly tally of job cuts posted by an outfit called Challenger, Gray & Christmas. It sounds like a law firm, and investors are quick to judge this one when it crosses the wires, usually a day or two before the big nonfarm payrolls report. Here, too, there are macro tells. 

Job cut announcements spiked in February and March, ahead of Liberation Day, and probably due to the once-thriving Department of Government Efficiency’s (DOGE) efforts. Data from April through July has been much more encouraging. If we see another round of corporate layoffs, this could be among the first data points to catch it. 

Challenger Jobs Cuts: Close to the 2022-2024 Average

Source: Challenger, Gray & Christmas

4. ADP Private Payrolls

ADP Private Payrolls comes out before the official establishment and household employment surveys, as well. Maybe the most chastised among the litany of labor market gauges, it aims to measure the private sector in isolation (excluding changes in government employment). ADP’s statistical correlation to the official jobs report published on the subsequent Friday is infamously low from month to month. Stretch out the analysis several quarters, however, and it actually has a decent track record and relationship to the BLS’s surveys.

As it stands, ADP Private Payrolls peaked above one million in July and August 2021, then straddled a 100,000 pace of monthly job growth from early 2023 through Q1 this year. Similar to the trend in nonfarm payrolls, Q2 experienced a marked decline. The June 2025 number was negative, followed by a positive inflection in July. Private-sector employment has been sluggish for nearly two and a half years, and a single macroeconomic hiccup could send it into solid negative territory. It bears watching.

ADP Private Payrolls Report: A July Improvement

Source: ADP

5. Initial and Continuing Claims

Initial and Continuing Claims comes at the usual time during this holiday-shortened week. The data roll in at 8:30 a.m. ET on Thursday, 15 minutes after ADP Private Payrolls, and an hour after Challenger Job Cuts. Macro onlookers searching for fireworks may want to look elsewhere, though.

• Initial Claims has been incredibly steady for almost four years, ranging from slightly below 200,000 to a bit above 250,000 first-time applications for unemployment benefits. Why so steady when other data have been volatile? Well, Initial Claims doesn’t take into account government data, so DOGE’s impact is seen here. Also, the reality that relatively few workers are being laid off (for now) mathematically prevents the figure from spiking.

• Continuing Claims is a little different. This measure is one week in arrears compared to Initial Claims, so it’s not as much of a bellwether. Nevertheless, anybody pulling up a chart of the sum of recurring applications for unemployment benefits will be alarmed at first blush. Continuing Claims is at cycle highs going back to November of 2021, when the labor market was still normalizing after COVID. This is the “slow to hire” poster child of all the economic data points at the moment. 

What might it take to get employers to pick up the hiring pace? More confidence in the macro outlook, spurred demand (perhaps driven by the effects of President Trump’s One Big, Beautiful Bill Act), and a broadening out of the employment gains beyond those non-cyclical areas.

Continuing Claims: Near the Highest Since November 2021

Source: St. Louis Federal Reserve

Demographics and Labor Force Dynamics

Youth Unemployment (Age 16–24): We’re headlong into a complete assessment of the jobs market, and we haven’t mentioned AI. The artificial intelligence megatrend appears to be having a significant impact in certain areas. The hardest hit is the 16- to 24-year-old age cohort. 

Youth unemployment has been on the rise, along with the jobless rate for young people fresh out of undergrad. The narrative is that low-skill activities (grunt work, you might say) are becoming increasingly performed by AI tools. Economists are now quick to sift through the nonfarm payrolls report to uncover the latest unemployment rate for those aged 16-24.

Age 16-24 Unemployment Rate Touches 10%

Source: St. Louis Federal Reserve

Baby Boomer Retirements: The tired quip among advisors and retirement experts is that 10,000 baby boomers call it quits each day. That actual number has wobbled as the jobs market has turned from firm to soft, but tens of millions of those now aged 65 and older are indeed exiting the labor force en masse. 

The result is a smaller labor supply, which can push wage growth up (and spark inflation) and suppress the reported unemployment rate.

Civilian Labor Force Participation Rate Declining as Older Workers Exit

Source: Augur Infinity

Immigration and Deportation: President Trump’s 2024 campaign promise to deport millions of illegal aliens is being kept. The U.S. Immigration and Customs Enforcement's (ICE) mission to protect America from cross-border crime is seen in monthly labor supply trends. For years, the open-border policy had resulted in folks entering the country illegally, thereby effectively increasing the workforce. 

Now, as ICE physically takes people out of the country (and self-deportation has increased), the labor pool shrinks. Like baby boomers retiring, there are fewer available workers to fill open positions. This construct keeps wage growth sticky to the upside and prevents the unemployment rate from creeping too high. It’s now estimated that the breakeven pace of monthly job growth needed to keep the unemployment rate unchanged may be as low as 50,000.

Foreign-Born Worker Count Down Four Months in a Row

Source: Zerohedge

Whatever Happened to the Sahm Rule?

Investors paying close attention to labor trends may recall that the Real-time Sahm Rule Recession Indicator, which triggers when the three-month moving average of the unemployment rate rises by 0.5 percentage points above its low of the previous year, flashed a recession warning last summer. 

It didn’t live up to the hype, and US GDP growth has continued to this day. The Sahm Rule “untriggered” in October of 2024, and former Fed official and current economist Claudia Sahm herself insists that her namesake rule of thumb may not apply well to today’s economy.

Sahm Rule Indicator: A Two-Year Low

Source: St. Louis Federal Reserve

The Overseas Story: Europe On a Weaker Footing

Among the many lessons this year has taught us is that what happens outside our borders matters greatly. Long-term sovereign bond yields have soared from Japan to Germany to the UK, putting upward pressure on the US 30-year interest rate. But let’s home in on the European labor market. There are similarities with what’s occurring domestically. The upshot is that the global economy moves like a giant ship: momentum matters, and steering it is a slow process.

Euro Area Unemployment Holds at 6.2%

Source: Eurostat

Compared to the US, Europe’s jobs situation is even weaker, suffering from declining hours, higher underemployment, and eroding institutional protections. The Euro Area’s labor market is more rigid, older, and just less dynamic versus our flexible and versatile workforce. Earlier this year, we described the global macro succinctly: Europe is a museum, Japan is a nursing home, and China is a jail. Could that be changing? 

Well, country-level authorities across the continent have begun to take steps to stimulate their respective regions. Increased defense spending, combined with a more accommodative monetary policy set forth by the European Central Bank (ECB), could help improve overall dynamism. Another bullish macro factor? A weaker euro currency.

You see, when the EURUSD currency pair depreciates, it makes European exports more attractive globally. Rising exports map directly to stronger GDP growth. It remains to be seen if earnings growth among the prominent three bourses (the German DAX, France’s CAC 40, and the UK FTSE 100) will boast inclines that can rival the S&P 500.

Global economists should not overlook the reality that Europe suffers from an underutilized workforce, with many EU member states plagued by underemployment among low and middle-income households. Lingering effects of years-long fiscal austerity are still being felt, and it’s difficult to see AI improving that trend much in the near term.

As for the tariff hit, we might already be seeing it come through. Germany, Europe’s most important economy, fell back into economic contraction in Q2. Its GDP decline marked the seventh quarter of the previous 11 to be negative. 

Germany’s Economy Slips Back Into Contraction

Source: Trading Economics

Ironically, price action tells a wholly different story. The DAX and FTSE 100 are in outright bull-market mode (the CAC 40 struggles amid political upheaval in Paris). It’s a reminder that the stock market doesn’t always track economic trends, including what’s happening on the ground with the labor market. Allio’s Altitude AI portfolios have included high-performing European stocks throughout this year, and we constantly monitor macro trends across the pond.

Macro Investing Perspective: How to Position Now

Other investors were caught offside at the turn of the year. Pessimism surrounded European stocks, while the US Magnificent Seven were as sexy as ever. George Washington donned the cover of finance magazines, and “American Exceptionalism” was the zeitgeist. Jesse Livermore, a famous (turned infamous) trader from a century ago, reportedly quipped that the stock market is designed to fool most of the people, most of the time. Case in point: foreign markets in 2025.

International equities pace for their second-best year in the last 30, and the bond market has delivered healthy returns in the face of intense media fearmongering. Oil prices are depressed, with US retail gasoline potentially poised to print fresh lows going back to early 2021, and the US Dollar Index (DXY) has steadied itself after a first-half drubbing.

US Dollar Index: Stabilizing Under 100

Source: Stockcharts.com

The August jobs report, to be released on Friday, September 5, could be a market mover and one that shakes up the macro backdrop. A high headline employment gain, a dip in the jobless rate, and firm growth in average hourly earnings could keep the Fed on hold. A second-straight weak set of nonfarm payrolls data might lead to a jumbo 50-basis-point interest rate cut. Everything is on the table.

We urge clients and all investors to keep up with Allio’s Macro Dashboard. The data presented there can go a long way in helping you spot risks in real-time. Above all, a dynamic asset allocation is required to navigate fast-changing economic underpinnings.

The Bottom Line

The labor market is on edge. That’s not our opinion, but what the collection of macro jobs data assert. We’ll know much more in the weeks ahead, including how the Fed intends to navigate the employment situation that is slow to hire and slow to fire. It’s unlikely that stall speed persists for very long, so holding a diversified and dynamic macro portfolio is paramount as we head into the end of the year.