Submitted by Uric Dufrene, Ph. D., Sanders Chair in Business, Indiana University Southeast
The Summer of 2025 may go down in the economic history books as the start of the self-inflicted recession. The temperatures may have been hot, but job creation was ice cold. Over the past three months, the nation has averaged just 29,000 new jobs per month, one of the weakest three-month stretches since the Great Recession. That level of job growth is usually seen either heading into or coming out of a recession.
The chill became even more apparent with the latest Bureau of Labor Statistics report released this past Friday. Only 22,000 jobs were added in August, and the unemployment rate rose to 4.3%, the highest since 2021. While a 4.3% unemployment rate isn’t alarming in isolation, a three-month average below 30,000 jobs is a red flag, no matter how it’s spun.
The leading sector? Healthcare, which added 31,000 jobs. Some back-of-the-envelope math shows that without gains in healthcare; overall job growth would have been negative. The economy isn’t on stable footing if it’s only adding jobs in one sector.
It’s been about six months since the “Liberation Day” announcement of reciprocal tariffs. Since then, multiple versions have emerged, but signs of their impact are now showing up in employment data. Manufacturing, the intended beneficiary of tariffs, lost another 14,000 jobs in August. Wholesale trade, a sector heavily involved in domestic and international commerce, declined by 12,000 jobs.
The trend is not new. Manufacturing is down 78,000 jobs over the past year, and wholesale trade has shed 32,000 jobs since May. Wholesalers primarily sell goods to other businesses. So, a decline in this space can signal falling business-to-business demand, with ripple effects across the broader economy.
Labor market health is always important, but it’s especially critical at this point in the economic cycle. The current recovery has been driven largely by consumer spending, and consumption has been the main engine of GDP growth. In fact, over the past 3½ years, consumption’s contribution has equaled or exceeded total GDP growth in 6 quarters.
That means any pullback in consumer spending would significantly slow the economy, and what triggers that slowdown? The labor market.
That’s why Treasury bond yields fell sharply after the jobs report, with the 10-year yield seeing a significant drop. Investors are now pricing in a near-certain September rate cut, with momentum building for two additional cuts before year’s end. In an Eye of the Economy earlier this year, we anticipated three cuts and a pivot by the Fed toward employment concerns over inflation. We may be seeing that shift play out.
If the next CPI report comes in cooler than expected, we could even see a 0.5% rate cut in September. A hot CPI will produce a significant down day in the equity markets.
Falling job creation and a rising unemployment rate will rattle consumer confidence. That hesitancy can stall spending and slow the economy. Back in our Mid-Year Outlook this past May, we projected slower growth for the remainder of 2025, but didn’t anticipate a recession. That forecast is now in question.
If job creation remains weak, job openings continue to shrink, and sectors like manufacturing stay soft, we may indeed be headed for a downturn. But there is a silver lining: a softening economy could bring falling interest rates and lower mortgage rates, a much-needed lifeline for the housing sector.
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