• The U.S. labor market shows signs of cooling, with nonfarm payroll gains expected to slow and unemployment ticking higher.
  • Kevin Hassett, a former White House economic adviser, characterizes the shift as a normalization from an overheated pace.
  • Analysts warn that persistent wage deceleration could signal weakening demand, though productivity gains may offset risks.

A Shift in Momentum

The U.S. jobs market, once described as "rip-roaring" by economist Kevin Hassett, is now exhibiting clear signs of deceleration. According to people familiar with recent internal White House discussions, the administration is closely monitoring labor reports that point to a steady softening in hiring. Friday's nonfarm payrolls release is expected to show a gain of around 180,000, down from the 2023 average of 250,000, while the unemployment rate is projected to edge up to 3.9%.

Hassett, who served as chairman of the Council of Economic Advisers under President Donald Trump, told colleagues in a private call last week that the economy is moving from "rip-roaring to merely strong." He emphasized that this is a natural correction after a period of extraordinary growth, but cautioned that further weakness could prompt policy adjustments.

The cooling is most pronounced in interest-rate-sensitive sectors. Manufacturing payrolls have contracted for two consecutive months, and temporary help services—a bellwether for future hiring—have shed jobs. Consumer-facing industries like retail and leisure are also pulling back, according to Bureau of Labor Statistics data. One senior labor economist, who requested anonymity to discuss preliminary data, noted that "the white-hot labor market of 2022-2023 is clearly behind us."

Wage growth, a key inflation driver, is also moderating. Average hourly earnings are expected to rise 4.1% year-over-year, down from a peak of 5.9% in early 2023. This aligns with the Federal Reserve's goal of cooling labor demand without triggering a sharp rise in unemployment—a so-called soft landing.

"We're seeing a rebalancing, not a collapse," said a former Fed staffer now at a major bank, speaking on background. "But the risks are tilted to the downside. If consumer spending falters, hiring could slow more abruptly."

Hassett's remarks have stirred debate among market participants. Some view his characterization as an attempt to downplay economic weakness ahead of the election. Others argue that the labor market remains historically tight, with 1.4 job openings per unemployed worker.

The White House declined to comment on Hassett's comments. The Treasury Department did not respond to requests for comment.

Market Implications

Bond yields have fallen in recent weeks as traders price in a greater chance of Fed rate cuts later this year. The 10-year Treasury yield slipped to 4.48% on Tuesday, down from 4.70% a month ago. Equity markets remain volatile, with the S&P 500 down 1.2% over the past week.

"If payrolls miss expectations, we could see a significant rally in bonds and a selloff in cyclical stocks," said a portfolio manager at a large asset manager.

Nonetheless, productivity gains—running above 2% annually—may provide a buffer. If companies can produce more with fewer workers, profit margins could hold up even as hiring slows.

Hassett, now a visiting scholar at the Hoover Institution, is expected to elaborate on his views at a conference later this month.

Correction: An earlier version of this article misstated the year-over-year wage growth peak as 6.0%. It has been corrected to 5.9%.