Implications:  Today’s labor market report was hotly anticipated following President Trump’s firing of the BLS head after July’s weak data and large downward revisions, and August data are likely to add to the drama. Nonfarm payrolls increased 22,000 in August, lagging the consensus expected 77,000.  Worse, payroll gains for prior months were revised down by 21,000, meaning the net gain was only 1,000.  Notably, June data now shows nonfarm payrolls dropped 13,000 following these revisions, the first decline since 2020.  While the White House is likely going to continue pointing the finger at political manipulation, new policies that strictly enforce immigration laws, as well as uncertainty around trade policy and tariffs are likely weighing-down the job numbers. We like to follow payrolls excluding three sectors: government, education & health services, and leisure & hospitality, all of which are heavily influenced by government spending and regulation (including COVID lockdowns and re-openings).  This measure of “core payrolls” declined 36,000 in August, the fourth straight monthly drop, and is down 143,000 versus four months ago. One piece of good news is that civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 288,000 in August. However, the labor force grew an even faster 436,000, which pushed the unemployment rate up slightly to 4.3% in August.  Taken all together, while its clear the labor market is weakening, recent numbers are consistent with a slowing but still growing economy.  Stricter immigration enforcement is likely a major part of the story, with a shift from essentially open borders having a major impact on labor supply.  The household survey shows that the foreign-born population (age 16+) has dropped 1.9 million since January while foreign-born employment is down nearly 1.0 million.  At the same time, native-born employment has grown 1.9 million.  In other words, recent softness in the labor market could reflect fewer illegal immigrants while native-born (and, potentially, legal immigrants) increase jobs and hours worked.  On the inflation front, average hourly earnings rose 0.3% in August and are up 3.7% versus a year ago.  However, these earnings are up only 3.5% annualized in the past six months, which along with recent weak headline jobs numbers gives the Federal Reserve all the ammunition it needs to re-start rate cuts later this month.  Finally, the Trump Administration is making progress reducing federal payrolls, which when we exclude the Post Office and Census workers are down 85,000 versus January, the largest seven-month drop on record going back to at least 1990.  In time, we think a smaller government should pay dividends in the form of faster economic growth.

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