The US labour market is showing clear signs of stress, lowering the threshold for interest rate cuts by the Federal Reserve and fuelling expectations of a weaker dollar, according to Bandhan AMC’s latest report.
Non-farm payrolls rose by just 22,000 in August, far below the consensus estimate of 75,000, the asset manager said. Job gains averaged only 27,000 between May and August, a steep slowdown from the 123,000 monthly average recorded in the previous four months.
The softening job market pushed the unemployment rate up to 4.3 per cent in August, signalling that job creation fell below breakeven levels. Bandhan AMC noted that demand factors were weighing more heavily than supply, worsening the labour imbalance.
“Seven out of ten private sectors shed jobs over the past three months,” the report stated, adding that education and health services — typically resilient to economic cycles — accounted for most of the gains.
The report highlighted troubling indicators within the broader labour force. The share of Americans unemployed for more than 27 weeks is now the highest since April 2016, excluding the pandemic years. Meanwhile, the number of people outside the labour force but still wanting a job rose to 6.4 million in August, its highest since March 2015.
Initial claims for unemployment insurance have started to climb again since late July, while continuing claims remain elevated. Employment components of key industry surveys such as the ISM Services and Manufacturing indices also continue to show weakness.
Another area of concern flagged in the report was the divergence in unemployment rates across racial and ethnic groups, which has widened sharply compared with the overall rate.
“These data suggest the risks of slower job growth, higher unemployment and weaker consumption spending are rising,” the report said.
Markets are now anticipating around three Fed rate cuts before the end of 2025, with the possibility of more if subsequent economic data deteriorates further. Lower rates are seen as negative for the US dollar.
The report underscored that while labour market resilience had been a key pillar supporting the US economy through earlier bouts of tightening, the trend shift since May points to mounting cracks.
“Slowing payroll additions and rising unemployment make the Fed’s task more urgent,” said Sreejith Balasubramanian, economist at Bandhan AMC’s fixed income fund management division and author of the note.
Bandhan AMC’s analysis emphasised the asymmetry in sectoral employment, with cyclical industries struggling while defensive areas keep overall payrolls in positive territory. Such skewed gains, the report suggested, could amplify volatility if hiring in non-cyclical areas also slows.
The weakening in labour conditions may spill into consumer demand, which has remained a bright spot for the US economy. “Higher unemployment coupled with longer jobless spells can weigh heavily on household consumption, further dampening growth momentum,” the report warned.
Financial markets are increasingly pricing in the prospect of policy easing, with traders betting on faster Fed action if upcoming releases on jobs, inflation and activity confirm the slowdown.
For global investors, the shift in expectations could mean greater pressure on the dollar, which has already shown signs of weakness in recent sessions.
The report concluded that the convergence of these factors has “lowered the bar” for Fed cuts. “The extent of easing could be larger if incremental data continue to disappoint,” Bandhan AMC said.