Throughout its rate setting process, the Federal Reserve has reiterated that it is data dependent. One of the key developments during Q3 was a softening in some labor market trends. This weakness provided the catalyst for the Fed to act, as payroll growth slowed close to 0 in July, plus the prior three months, as part of their typical process, were revised lower. On top of that, the annual data revisions for the prior March 2024 to March 2025 period showed about 75,000 fewer jobs per month were added during that period. That lower pace is reflected in the red line in Chart 1 below. The softer new data combined with the revisions spurred the Fed into action.
Chart 1
Going forward, that strength of the labor market relative to its potential is one key to determining where the Fed should set its policy rates. In 2022, when growth slowed to the 2% range, payroll growth was still averaging 300,000 per month and unemployment was in the mid 3% range. In 2023 and 2024, the “soft landing” saw GDP growth rise to the 3% range, while payroll growth slowed to around 200,000 per month and the unemployment rate slowly moved above 4%.
The recent deceleration in payroll growth to near 0 has come with a modest downtick in growth and modest uptick in unemployment, but compared to the prior rates of payroll growth, GDP growth and unemployment are not as bad as one would expect.
Part of this is the result of slower immigration. After global labor flows stopped in 2020, the reopening in 2021 led to a surge in immigration in 2022 and 2023, raising the “breakeven” rate of payrolls, or the pace of payroll growth relative to the growth in the overall pool of workers needed to keep unemployment steady, to over 200,000. The subsequent immigration slowdown that started in 2024 and continued into 2025 has lowered this rate to about 50,000.
While the positive news that slower payroll growth does not portend recession is positive, one risk is that if the Fed uses slower payroll growth to justify interest rate cuts, while at the same time the labor market lacks extra workers to grow, then the result would be wage inflation. A potential offset would be the ongoing rollout of AI helping to increase labor force productivity, allowing more GDP growth at modest labor growth.
Data showing a slower labor market delivered a rate cut. The market will be watching the data closely in Q4 to determine if this path of a supportive Fed and modest economic growth can continue as expected.
See Also
Important Disclosures:
Past performance is not indicative of future results. Different types of investments involve varying degrees of risk. Therefore, there can be no assurance that the future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Grimes & Company Wealth Management, LLC [“Grimes”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content in this blog may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Grimes. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Grimes is engaged, or continues to be engaged, to provide investment advisory services. Grimes is not a law firm and does not provide legal advice. Grimes is not a certified public accounting firm. Grimes is affiliated with S&C Tax Advisors, which provides tax preparation and related tax services. Tax services provided by S&C Tax Advisors are separate and distinct from the investment advisory services provided by Grimes and are subject to a separate engagement. Clients are under no obligation to engage S&C Tax Advisors and may obtain tax preparation or other tax services from any provider of their choosing. Information provided by Grimes regarding tax matters in connection with its investment advisory services should not be construed as individualized tax advice or a substitute for services provided by a qualified tax professional. Grimes is not an insurance agent. Grimes Representatives may, however, separately provide insurance products and services through our affiliate, Grimes Wealth Protection Group, LLC. If the client desires, one of Grimes’ representatives, acting in their capacity as a representative of Grimes Wealth Protection Group, LLC or in their separate licensed individual capacities, can be engaged to provide insurance sales/services as described on Grimes’ written disclosure Brochure per the terms and conditions of a separate engagement. Grimes is affiliated with Grimes Trust Services, a corporate trustee that offers trustee services under a separate engagement. Clients are under no obligation to retain Grimes Trust Services for trustee services. Any information provided by Grimes regarding trust matters in connection with its investment advisory services should not constitute trustee services and be considered a substitute for services provided by a qualified professional. Nothing contained herein should be construed as the receipt of, or a substitute for, personalized investment advice from Grimes. A copy of our current written disclosure Brochure discussing our advisory services and fees is available for review upon request or athttps://www.grimesco.com/form-crs-adv/ Please Note: Grimes does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Grimes’ web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Grimes client, please contact Grimes, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.