But more recently, data in the labor sector has weakened. So much so that the Federal Open Market Committee (FOMC) could be forced back to weighing both sides of its mandate (maximum employment and inflation at 2%) equally. To stabilize the former might require them to cut rates.

This afternoon’s jobs report has done little to inspire confidence. The Bureau of Labor Statistics reported that in July nonfarm payroll employment added a subdued 73,000 jobs, with the unemployment rate holding steady at 4.2%. New jobs came from the healthcare and social assistance sectors, while federal government continued to lose roles.

Two points which will stand out to economists are the demographics where unemployment is growing. The BLS reported that last month the number of unemployed new entrants (people searching for their first job) increased by 275,000 to 985,000. Moreover, the number of long-term unemployed (those jobless for 27 weeks or more) increased by 179,000 to 1.8 million—now accounting for approximately 25% of all unemployed people.

Further signs of sickness can be seen in job openings. This week’s Job Openings and Labour Turnover Survey (JOLTS) came in below analysts expectations, with available positions down to 7.18 million from a 7.36 million reading in June. A key driver in the downturn was in healthcare, which had provided a boost to openings in recent reports. Elsewhere retail trade, leisure and hospitality also posted downturns in openings.

A gamut of issues could be contributing to the greying picture, with economists speculating it could be anything from AI job displacement, through to slower hiring because of Trump 2.0’s policies, or because of fundamental shifts in supply.

Depending where you land in the debate, it might also help answer the question of why the BLS was forced to make such significant revisions to its data for earlier this year. Last month the Labor Department reported payrolls grew by just 73,000 in July, well below forecasts for about 100,000. It also revised down estimates for May and June, by a cut of 258,000, putting the gain over those three months at 35,000.

The counterweight to the labor market’s apparent downward trajectory is the fact that unemployment hasn’t spiked—despite the weak payroll and openings data. In July the BLS reported that despite the minor payroll gains, America’s unemployment rate stayed around the 4.2% mark—suggesting labor supply is shrinking almost equally to demand.

It’s for this reason that recession indicators aren’t yet flashing red. The Sahm Rule (which has been largely accurate in predicting a recession based on the unemployment rate’s three-month moving average) in July sat at a healthy 0.10 percentage points—well off the 0.50 benchmark which would indicate an incoming economic regression.

If the early signals of labor market weakness prove persistent, all of that could change. What economists—and the Fed—really need to know, is the causation.

A question of confidence

A major factor shaping the employment market is uncertainty, namely how much decision-makers batten down the hatches against Trump-induced headwinds.

With questions over tariffs and immigration still hanging over the outlook, it’s perhaps no surprise that when The Conference Board released its U.S. CEO Confidence report for the third quarter it confirmed 34% of CEOs expected a net reduction in their workforce over the next 12 months.

Immigration and confidence are two major considerations for David Doyle, Macquarie’s head of economics. He describes the current market as “low turnover” with few layoffs but limited hiring too—hinted at by spiking numbers in unemployment to new joiners to the labor force.

That lack of hiring is due to uncertainty, Doyle told Fortune: “When there’s elevated uncertainty, one of the easiest things to do is to delay new hiring decisions. Maybe when [decision makers] have more clarity on the outlook for their companies and the future earnings growth, that could pave the way for … the handcuffs to come off.”

There’s also been a “significant” shift in immigration policy, Doyle added, which is keeping the unemployment rate stable as lower hiring is met with labor supply shrinking. However that near-equilibrium can only be maintained to a point, he added, as if confidence or any positive fiscal stimulus arrives courtesy of the One Big, Beautiful Bill Act then firms may find themselves trying to hire without anyone to fill the positions—an outcome which may materialize early in 2026.

With the margins so small in either direction—just 73,000 jobs created last month—that leaves little room for error, Doyle added: “We’re in this equilibrium, but if the layoffs pick up even a little bit you could see that throw the equilibrium off, and unemployment starts to rise. The flip side of that is once we get beyond that near-term softness, near-term weakness, it’s possible things go the other way and unemployment can fall.”

The AI displacement issue

Another question is whether, at long last, the much-warned about wave of AI job losses is finally here. According to a St Louis Fed (FRED) study published last week: “Unlike previous technological revolutions that primarily affected manufacturing or routine clerical work, generative AI can target cognitive tasks performed by knowledge workers—traditionally among the most secure employment categories.”

Per the the study, industries like computer and math roles (those which adopted AI more widely) are among the professions seeing the highest levels of unemployment—though how much of this is due to displacement, or a rebalance following COVID hiring, is up for debate.

It’s hard to place the ultimate impact of AI on the spectrum of short-term blip to long-term upheaval. After all, for every Goldman Sachs report warning of 300 million jobs lost or displaced, there’s a World Economic Forum study saying that by 2030 AI will create 170 million new roles.

One of the authors of the FRED survey, senior economic policy advisor Serdar Ozkan, told Fortune that AI displacement is “a surprisingly significant contributor that deserves more attention,” but added: “other factors are also contributing to rising unemployment and slowing hiring, including post-pandemic monetary policy tightening and economic policy uncertainty.”

What stands out to Ozkan not only in his AI displacement work, but also his labor market research more widely, is the demographics which are searching for jobs: Younger people and college grads. Per his research recent college graduates, “traditionally the most employable demographic,” are experiencing unemployment rates of 4.59% compared to 3.25% in 2019—a 1.34 percentage point increase that far exceeds other groups. Meanwhile non-college workers in the same age group saw only a 0.47 percentage point increase during the same period. 

“That said, for the first time in decades, higher education is providing less employment protection during an economic transition, signaling a fundamental shift in how technological change affects the workforce,” Ozkan added.

Economists will have trained a keen eye on the data for younger labor in the coming months, as often the summer jobs market means those in the 16-24 category find themselves seasonally employed and out of work come autumn—an indicator to watch out for in a month or two’s time.

When’s it time to worry?

To be sure, many of the factors shaping the labor market at present are here to stay. And there’s also one additional tension which could exacerbate the current tension.

Doyle explains: “There’s also been a surge in retirements this year. The first baby boomers that were born in 1946, they’re now turning 80, and you cascade down from that—I believe the last baby boomer year was 1964—so even the youngest baby boomers are into their 60s now. You now have this huge generation that is gonna be [a] drag on labor force growth.”

This makes the Fed’s job significantly harder in the coming years, he added: “It’s trickier to try and navigate when you have what’s going on in the labor market, when you have these structural developments occurring and trying to separate that from cyclically what’s going on in the economy.”

The tightrope the labor market will have to walk makes bit “vulnerable” Nancy Vanden Houten, lead economist at Oxford Economics, tells Fortune: “With the pace of hiring weak, any rise in layoffs risks triggering a cycle of cuts in consumer spending that lead to more layoffs and so on. We’ve started to see some hints of more layoffs in [this week’s] JOLTS report, initial jobless claims are inching higher and layoffs were mentioned a bit more in the Federal Reserve’s Beige Book, released [Wednesday].”

Both Doyle and Vanden Houten also defended the BLS’s revisions (with criticism having come the loudest from the White House itself), arguing participation in reporting is dropping off and as such, outcomes have less evidence to model from.

This caveat will be nothing new for the Fed when it meets later this month, and will contribute to a shift in priorities: “We expect concerns about the labor market will outweigh concerns about inflation at this month’s meeting and the FOMC will cut rates,” Vanden Houten says.

So while economists are not yet eyeing a labor-related recession, they believe the Fed will need to act swiftly to bolster the market as it begins to tremble.