FILE PHOTO: A "now hiring" sign is displayed outside Taylor Party and Equipment Rentals in Somerville, Massachusetts, U.S., September 1, 2022. REUTERS/Brian Snyder/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) -Forecasts for tepid U.S. job growth in August and a rise in unemployment to 4.3%, if accurate, would confirm a softening labor market and seal the case for an interest rate cut from the Federal Reserve this month.

The Labor Department's closely watched employment report on Friday will follow this week's news of more unemployed people than vacancies in July for the first time since the COVID-19 pandemic. Job growth has shifted into stall-speed, with economists blaming President Donald Trump's sweeping import tariffs and an immigration crackdown that has reduced the labor pool. Softness in the labor market is mostly coming from the hiring side.

Trump's levies, which have boosted the average U.S. tariff rate to the highest level since 1934, stoked fears of inflation and prompted the U.S. central bank to pause its interest cutting cycle. Just as some of the uncertainty over trade policy was starting to lift with most tariffs now in place, a U.S. appeals court ruled last Friday that most of the duties were illegal, keeping businesses in a state of flux.

"Uncertainty is the killer of the labor market," said Ron Hetrick, a senior labor economist at Lightcast. "We have a lot of companies and such that are pausing because of tariffs, pausing because of uncertain Fed action."

A Reuters survey of economists expected the Labor Department's Bureau of Labor Statistics (BLS) would report that nonfarm payrolls increased by 75,000 jobs last month after rising by 73,000 in July.

Economists said job growth around these levels was more realistic given the reduction in labor supply.

Estimates ranged from no jobs added to 144,000 positions created. The initial August job count has tended to exhibit a weak bias, with revisions subsequently showing strength.

Revisions to June and July payroll counts will be under scrutiny. Sharp downgrades to May and June employment totaling 258,000 jobs raised the ire of Trump last month. Trump fired BLS Commissioner Erika McEntarfer, accusing her, without evidence, of faking the employment data.

Economists have defended McEntarfer and attributed the revisions to the 'birth-and-death" model, a method the BLS uses to try to estimate how many jobs were gained or lost because of companies opening or closing in a given month.

"We are in a low churn labor market, with not a lot of hiring or firing happening. So that means the job growth that we do see in the economy is mainly driven by the net birth of new firms," said Ernie Tedeschi, director of economics at the Budget Lab at Yale University.

"But that just happens to be the most imputed part. It's the most sensitive to revision, because it's the result of explicit modeling by BLS, rather than something that they can survey."

Employment gains averaged 35,000 jobs per month over the second quarter compared to 123,000 during the same period in 2024.

BENCHMARK REVISION

Slow job growth is likely to be reinforced when the BLS next Tuesday publishes its preliminary revision estimate to the employment level for the 12 months through March.

Based on available Quarterly Census of Employment and Wages (QCEW) data, economists estimated the level of employment could be revised down by as much as 800,000. The QCEW data is derived from employers' reports to the state unemployment insurance programs.

Trump has nominated E.J. Antoni, chief economist at the conservative think tank Heritage Foundation, to head the BLS. Antoni, who has penned opinion pieces critical of the bureau and even suggested suspending the monthly employment report, is viewed as unqualified by economists across political ideologies.

"Trust in the numbers will depend on whether the commissioner is seen as nonpartisan, somebody who values the BLS' independence and wants to get the gospel truth out there, rather than responding to political pressure," said Tedeschi.

The labor force declined by 800,000 in the second quarter, attributed to immigration raids and termination of temporary legal status for hundreds of thousands of immigrants. The shrinking labor pool is not only curbing job growth, but also preventing a big rise in the unemployment rate. The unemployment rate is forecast to have climbed from 4.2% in July.

Economists estimate that the economy needs to create 50,000-75,000 jobs per month to keep up with growth in the working age population.

Fed Chair Jerome Powell last month signaled a possible rate cut at the U.S. central bank's September 16-17 policy meeting, acknowledging the rising labor market risks, but also added that inflation remained a threat. The Fed has kept its benchmark overnight interest rate in the 4.25%-4.50% range since December.

Job gains likely remained concentrated in the healthcare and social assistance sector. But warning signs are flashing as government data on Wednesday showed job openings in the sector declining for a second straight month in July.

A strike by 3,200 Boeing workers is likely to undercut manufacturing payrolls, already pressured by tariffs. More federal government job losses were expected amid spending cuts by the White House.

"We see more evidence than not that labor demand is weakening further into August," said Veronica Clark, an economist at Citigroup. "The risk of layoffs this year is underestimated by markets and Fed officials."

(Reporting by Lucia Mutikani; Editing by Richard Chang)