Economic Outlook for Q3 2025
Quarterly Economics Briefing–Q3 2025
Posted Date: September 23, 2025
Key Themes and Takeaways
- Recent disappointing job growth numbers have once again called in to question the health of the labor market
- Other labor market indicators, particularly measures of unemployment and job losses, show a less dire situation
- Uncertainty remains high for the labor market, and it is difficult to predict the most likely path forward based on current information
An Abrupt Change to the Labor Market Outlook
In early August, the US Bureau of Labor Statistics (BLS) released the jobs report for July. The economy added 73,000 new jobs from June in the initial estimate, slightly below expectations of around 100,000. In addition to the July report, revisions were made to the May and June reports. Employment gains for April and May had been overestimated by 258,000 jobs. This brought the average jobs added to the economy down to 35,000 per month over the last three months (compared to the initial estimates of 150,000).
The state of the job market looked even more discouraging after the release of the August jobs report in early September. Just 22,000 jobs were added in the initial August estimate and further downward revisions to past data showed that job numbers in June actually declined. While job growth has been disappointing in recent months, these numbers alone do not tell the full story of the current state of the labor market.
In this brief, we will look at a broader swath of data to assess the labor market’s current state. In addition, we will outline several scenarios for how things may play out for the remainder of the year and what each scenario may mean for workers compensation.
A Holistic View of the Labor Market
After starting 2025 at a solid pace, employment growth in recent months has slowed to stall speed. Since April, monthly employment growth has averaged just 27,000 jobs per month, down from around 123,000 in the first four months of 2025 and 168,000 in 2024. This material change in trend has once again called into question the health of the labor market. Furthering these concerns were preliminary benchmark revisions announced in early September, indicating that employment growth between April 2024 and March 2025 was overestimated by 911,000 jobs. Job growth between that time period was initially estimated at 1.8 million or roughly 150,000 jobs added per month. After the revisions, job growth during this time period is now expected to average around 75,000 jobs per month. This change will be reflected in the data starting in February of 2026.
The story becomes even more interesting once looked at through the industry lens. Year-to-date, the economy has added 598,000 jobs overall and 515,000 jobs in Health Care and Social Assistance. In other words, roughly 86% of all new jobs created in 2025 have been in just one industry group. More recently, this trend has been even more pronounced. Over the past four months, the economy added 107,000 jobs overall and 249,000 jobs in Health Care and Social Assistance. All other industries combined saw employment shrink by over 140,000 jobs.
It’s clear to see how some may be concerned about the state of the labor market given the recent employment data. However, to gain a more complete view, we must also look at several data points beyond just monthly employment growth.
The first additional data point also comes from the monthly jobs report, but from a different survey. The unemployment rate has been relatively stable in 2025, trending between 4.0% and 4.3%. While it has risen from the low of 3.4% in April 2023, the rate remains historically low. Looking deeper into the data, we can see that the rise in unemployment from the lows has been primarily driven by younger workers (16–24 years old). In August, the unemployment rate for younger workers reached 10.5%, compared to an unemployment rate of just 3.6% for prime age workers (25–54 years old).
The unemployment rate rise has not come from workers losing their jobs but instead from new entrants to the labor market. This phenomenon has rarely happened through history and has never happened to the magnitude that we see today. The data paints a picture of a challenging labor market for recent college graduates looking for their first job and for those both employed and unemployed who may be seeking new work.
The next data points to look at come from Job Openings and Labor Turnover Survey (JOLTS). This survey provides additional context to the employment growth story by looking at the number of job openings, new hires, voluntary quits, and layoffs/separations each month, with employment growth roughly equaling hiring minus total separations. There are several noteworthy developments in the JOLTS data to aid in assessing the current state of the labor market.
The first is the number of job openings, which in July fell to its lowest level since early 2021. Demand for labor has clearly cooled since the pandemic, but this is only one side of the equation. Taken together with the number of unemployed workers, a measure of labor supply, we can see a material shift in the balance of the labor market that has occurred over the past several quarters.
Aside from a brief period during the pandemic, the economy has been running with a tight labor market since early 2018. Here, a “tight” labor market is simply defined as more job openings than workers currently looking for jobs. In July, this dynamic flipped, with now more unemployed workers looking for jobs than job openings available. Some may contend that this can be good for the economy because labor demand exceeding labor supply can have inflationary implications; while others may see this as a negative for workers who see fewer employment opportunities.
The other noteworthy takeaway from the JOLTS data is that the layoffs and discharges rate remains near historic lows. Through July, the rate of layoffs and discharges has risen slightly from the all-time low but remains stable in recent quarters and below the pre-pandemic trend. During previous periods of labor market deterioration, a material rise in the rate of layoffs and discharges can be seen.
While the data from the JOLTS report is slightly less current, one real-time data point that tells a similar story is the state filings for unemployment insurance benefits. Each week, state departments of labor publish the number of new applications for unemployment insurance and the number of applications for continuing benefits. These data points give us the most real-time look at the unemployment picture and corroborate the story told by other data points: the economy is not losing jobs faster than its normal pace.
New filings for unemployment benefits have followed the same seasonal patterns as in recent years and remain at consistent levels as well. Prior to significant deteriorations in the labor market, new claims for unemployment insurance rose sharply, something we have yet to see any sign of today.
Summary of the Recent Data
The larger picture painted by looking at the details of multiple different labor market metrics tells a story of an economy that has seen hiring slow while job losses also remain low. In his Jackson Hole, Wyoming speech in August, Fed Chair Jerome Powell described the labor market as being in a “curious kind of balance”1. There are few recessionary signals in the data apart from just the slow pace of job growth. While we have little insight into why firms make the decisions that they do, if we have to speculate, we suspect that heightened uncertainty around the economic outlook may have caused some companies to pause or cut back on hiring plans over the past few months. This, combined with the increasing prominence of the use of AI, could explain a portion of the slowdown in employment growth without deterioration in other labor metrics.
1 “Monetary Policy and the Fed’s Framework Review”, Federal Reserve Chair Jerome Powell, Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy, Jackson Hole, WY, August 22, 2025.
Where Does the Labor Market Go From Here?
As we think about how the labor market is likely to evolve for the remainder of 2025 and into 2026, we believe the cone of outcomes remains quite wide.
On the upside, the removal of economic uncertainty and continued growth in the economy may see companies resume hiring after a period of pause. Similar to last year, this may just be another “summer slowdown” before we see the labor market return to more robust growth through the end of the year. In this scenario, renewed growth in employment combined with still elevated wage growth could keep payroll growth elevated for workers compensation.
There is also a scenario in which the labor market remains in “muddle along” mode for longer. In this scenario, job growth remains slow, and a “loosening” of the labor market may lead to a slowdown in the pace of wage growth as companies have less pressure to attract and retain talent. Wage growth has been a key supporter of payroll growth so far through 2025, and a slowdown in this metric would see payroll growth slow as well, potentially putting some pressure on workers compensation premium.
While deterioration in the labor market is not our base case, we do remain cautious around the labor market because there is a growing probability that further deterioration may follow. In a downside scenario, employment growth moves into contraction, and we are likely to see a material slowdown in wage growth, bringing payroll growth down materially. Based on current information, if a recession does occur, we see a greater likelihood that it would be short and shallow (like 2001) rather than long and deep (like 2009).
Conclusion
The current state of the labor market is difficult to ascertain from any single data point. On the surface, sluggish job growth in recent months could raise alarm bells for some. By contrast, a still historically low unemployment rate with low levels of layoffs could reassure others. By taking a holistic approach across many different facets, we can gain a clearer understanding of the current state of the labor market and how it may evolve going forward. Hiring has slowed but layoffs and overall turnover remain low. New entrants into the labor force searching for jobs are having a more difficult time finding them, but those who have a job may not be at high risk of losing theirs.
Additionally, recent changes to immigration policies may have altered the supply of labor and lowered the level of employment growth needed each month to keep the unemployment rate from rising. Economic uncertainty remains elevated and the cone of outcomes for the future path of the labor market remains wide. While the labor market can no longer be unequivocally categorized as strong or solid, the broader set of data also makes the labor market difficult to categorize as weak or deteriorating just yet. If we had to put a label on it, we would call the current state of the labor market uncomfortably mediocre.
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