Tomorrow’s Jobs Report Is Bigger Than One Number

Tomorrow’s jobs report could move markets, but the real story is underemployment, falling participation, weak hiring, and corporate cost cutting.

KEY TAKEAWAYS

• The headline unemployment rate is an incomplete measure of labor-market health. It excludes discouraged workers who have stopped actively looking and does little to distinguish meaningful employment from severe underemployment.

• Several recent labor indicators point toward weakening beneath the surface. ADP payroll growth disappointed, JOLTS hiring fell, quits reached a post-pandemic low, and announced job cuts increased sharply.

• Falling unemployment can actually coexist with a deteriorating labor market. July’s unemployment rate dropped partly because hundreds of thousands of people left the labor force while participation fell to its lowest level since early 2021.

• Tomorrow’s jobs report has unusually important implications for Fed policy. A strong payroll number could reinforce Kevin Warsh’s hawkish stance and increase the probability of a September rate hike.

• Interest-rate policy may not address the labor market’s deeper problem. Companies increasingly appear focused on productivity, restructuring, expense reduction, and AI-enabled efficiency rather than expanding headcount.

MY HOT TAKES

• The 4.1% unemployment rate is giving policymakers false comfort. Labor-force participation, U-6, hiring, quits, and underemployment provide a more troubling picture than the headline statistic alone.

• The collapse in quits may be one of the most revealing signals in the data. Workers staying put suggests declining confidence in their ability to find better opportunities elsewhere.

• White-collar weakness deserves more attention. The sharp decline in professional and business services hiring may be an early warning that labor-market softness is moving deeper into higher-skilled employment.

• The Fed faces a problem monetary policy cannot neatly solve. Hiking could further suppress hiring, but cutting rates cannot force businesses to hire workers they believe technology can replace or augment.

• AI’s labor impact is larger than the number of layoffs explicitly attributed to AI. Even when companies call reductions “restructuring,” technology-driven productivity improvements may still be influencing how aggressively management teams reduce expenses and headcount.

• You can quote me: “A company that's already decided it can run leaner with software doesn't suddenly rehire because its borrowing costs dropped a quarter point.”

Coffee stained notebook. The Millers' son graduated with an engineering degree in May from a well-known midwest state school. Since graduating in June, he's been "underemployed"--his word, not mine–pulling shots at a coffee shop near campus while he sends resumes into what feels like a black hole. He checks his phone constantly. Nothing. He has informed his parents that he is considering grad school, not because he wants to, but because at least grad school has a start date. Does that sound like a picture of a “healthy” labor market at “full employment?” If you only read the headline Unemployment Rate, you would never know a single thing about him. Why? Because he literally doesn't show up in that number. Nobody like him does. Tomorrow morning, the Bureau of Labor Statistics will tell us whether America added jobs in August. It will not tell us anything about the Millers' son, or the millions of people like him quietly rearranging their lives around a labor market that keeps insisting it's fine.

This week's data gave us a preview, and it wasn't the reassurance Fed officials keep promising. ADP kicked things off Tuesday with private payrolls up just 38k in August, short of the 48k economists expected, though July got a modest upward revision to 46k. Wednesday's JOLTS Job Openings report, covering July, showed job openings essentially flat at 7.271 million–except that headline number is doing some quiet lying. June's openings were revised down by 177,000, so July's "gain" mostly just clawed back a number that was never really there. The part of JOLTS that actually moved was hiring, which fell to 5.054 million, the weakest month since February, and quits, which dropped to a 1.9% rate–a post-pandemic floor. Pro tip: Workers aren't walking away from jobs to chase better ones anymore. They're staying put because they don't trust there's anywhere better to go. Buried in the sector data was a 188,000 drop in professional and business services hiring, the kind of white-collar detail that tends to show up in the broader numbers a month or two later.

Then this morning, Challenger, Gray & Christmas dropped their Job Cuts number, and it jumped 39% to 52,881 announced cuts in August, up from July's two-year low of 33,429. Here's the twist worth sitting with: artificial intelligence, which has been the leading cited reason for layoffs for most of this year, was blamed for only 3,462 of August's cuts, which happens to be the lightest AI attribution in months. Restructuring led instead, with over 16,000 cuts, driven by consumer products giants like Procter & Gamble and Estée Lauder, plus food producers including Tyson, which is wrestling with a historic cattle shortage. But wait, don't let the "it's not AI this time" headline fool you into relief. We'll get back to why in a moment. 😉

Now rewind to the number that set the tone for this whole runup: July's jobs report, released August 7th. Payrolls fell by 23,000 against a forecast of positive 83,000. May and June were revised down by a combined 103,000, meaning the spring labor market was even weaker than we thought at the time. And yet–here's the sleight of hand–the unemployment rate actually dropped, from 4.2% to 4.1%. Fed officials love to cite that decline as evidence of resilience. What they don't dwell on is how it happened. The unemployment rate only counts people who are actively looking for work. When 264,000 people leave the labor force entirely–not because they found jobs, but because they gave up looking, retired early, or simply stopped counting themselves in–the unemployment rate can fall while the labor market is actually getting weaker underneath. The labor force participation rate slid to 61.4% in July, the lowest reading since early 2021. 👈 Read that again, please. That's not strength. That's people quietly exiting the game.

And the headline number hides a second group entirely: the underemployed. The broadest measure the Bureau of Labor Statistics (BLS) publishes, called U-6, includes not just the officially unemployed but also people working part-time who want full-time hours, and those who've stopped looking but still want a job. In July, U-6 sat at 7.9%, unchanged from June, and nearly double the 4.1% headline rate everyone quotes on television. That gap, essentially double, is where the Millers' son lives. He's employed, technically. He has a job. He also has an engineering degree and an espresso machine, and the official unemployment rate can't tell the difference between those two facts.

Tomorrow at 8:30 AM Wall Street Time, we get August's report, and the consensus calls for a rebound to around 55,000 jobs added, with the Unemployment Rate holding at 4.1%. But look at the range of forecasts on Wall Street–anywhere from a loss of 25,000 to a gain of 102,000. That's not a forecast. That's a shrug dressed up in a suit. What makes tomorrow's number unusually loaded is the man who'll be reacting to it. Fed Chair Kevin Warsh went full hawk at Jackson Hole late last month, calling the labor market "quite stable" and pointing to that same 4.1% unemployment rate as proof the economy sits at full employment. Markets took the hint. CME FedWatch odds of a September rate hike jumped from roughly 35% before his speech to as high as 66% after, settling around 62% as of yesterday's reading. Notice what that means for tomorrow's number: for the first time in a long while, a strong jobs print would be the hawkish outcome, not the relief rally. Good news for the Millers' son would be read on trading desks as bad news for borrowers everywhere else.

Here's the part worth sitting with longer than a headline allows. If the Fed hikes rates in September, credit tightens further on a hiring environment that's already fragile–small businesses stop expanding payrolls, and the people already on the margins of the labor market, our underemployed engineering graduates included, wait even longer. That much is quite straightforward. But here's the hard reality: cutting rates instead wouldn't fix this either. The forces squeezing this labor market aren't primarily about the cost of capital. They're about companies deep into a late economic cycle, extending profit margins not by growing revenue, but by cutting expenses–and increasingly, by leaning on AI to do more with fewer people. Cheaper money doesn't reverse that math. A company that's already decided it can run leaner with software doesn't suddenly rehire because its borrowing costs dropped a quarter point. Whether the Fed hikes, holds, or eventually cuts, the deeper question–whether corporate America is choosing efficiency over expansion as a matter of strategy, not interest rates–doesn't go away with a single FOMC decision.

Happening at the Miller’s kitchen table right now–their son got a callback–a real interview, for an actual engineering role, scheduled for next week. He's still pulling shots until then, and one interview doesn't undo months of rejection or fix a labor market that's quietly hollowing out from the middle. But it's a reminder that behind every U-6 percentage point, every JOLTS release, every headline that Washington waves around as proof everything's fine, there are people like him still working the phones, still showing up, a closet full of coffee stain t-shirts, still one callback away from the number finally meaning something for them personally. Tomorrow's report will move markets for a day. His interview might actually move his life. I know which one I'm rooting harder for. If you’re the Miller’s son–keep fighting! 💪

YESTERDAY’S MARKETS

Stocks rose yesterday, snapping a three-day losing streak across the major indexes. The S&P 500 gained 0.46%, the Nasdaq Composite added 0.45%, and the Dow Jones Industrial Average rose 295 points, or 0.56%, to 53,061. The 10-year Treasury yield touched 4.82% intraday, its highest level since November 2023, before stocks recovered into the close. NVIDIA and Johnson & Johnson led the Dow's advance.

NEXT UP

• Challenger Job Cuts (August) jumped to 52.88k from 33.439k.

• Initial Jobless Claims (August 29th) is expected to come in at 205k, slightly higher than last week’s 203k claims.

• ISM Services Index (August) may come in unchanged at 54.1.

• Fed speakers today: Waller, Hammock, and Goolsbee.

• Important earnings today: Ciena, Victoria’s Secret, Campbell’s, Guidewire Software, Zscaler, Docusign, Planet Labs, Ambarella, UiPath, and Samsara.

Please call if you have any questions,

Best regards,

Mark