Last month’s gain was well below expectations of about 75,000, and the unemployment rate rose to 4.3%, the highest it has been in nearly four years, according to the Bureau of Labor Statistics. 

“It’s clear the job market is struggling,” Mark Zandi, chief economist at Moody’s Analytics, told Fortune. “The economy is on the edge of recession: In fact, we may already be in one. As more revisions come in, it will probably show that employment is declining in a consistent way.”

The weak August tally followed downward revisions to prior months. June was restated to show a net job loss of 13,000—the first decline since 2020—while July’s gain was nudged higher, leaving overall employment 21,000 lower than previously reported.

Zandi called the June loss especially significant: “Historically, when recessions are dated, they’re dated back to the first month of payroll declines. That would suggest that if we are going into recession, it began in June.”

The weak showing reinforces a picture of a labor market that has almost entirely lost momentum. Hiring in health care and social assistance provided a modest boost, but it was largely offset by declines in federal government payrolls and a continued weakness in the energy and manufacturing sectors.

The weakness was most pronounced on the goods-producing side of the economy. Manufacturing shed 12,000 jobs in August, adding up to a 78,000 loss this year to date. Wholesale trade also shed workers. Construction was flat, but Zandi warned that the sector remains highly vulnerable.

“Manufacturing, transportation, distribution, mining, agriculture, construction—they’re all getting hit pretty hard,” he said.

Much of that pain, he argued, stems directly from policy. Higher tariffs are weighing on manufacturers and exporters, while immigration restrictions are constraining the supply of workers in industries that rely heavily on lower-skilled labor, such as construction, agriculture, retail, and hospitality.

“You can connect the dots between economic policy and the weak economy,” Zandi said. “The trade policy—higher tariffs—and the restrictive immigration policy are weighing heavily on the economy and lifting inflation.”

Even as health care remains a bright spot for hiring and state and local governments continue to add jobs, the drag from goods-related industries and federal job cuts is overshadowing those gains. Zandi cautioned that if the slowdown tips into outright recession, job losses will broaden out from goods-producing sectors into professional services, retail, and parts of health care as well.

But for now, layoffs remain subdued, a dynamic Zandi described as a “firewall” holding back a deeper downturn.

“Businesses haven’t panicked yet,” he said. “It’s just that they’ve turned more cautious in their hiring. That firewall between a stalling economy and a recession hasn’t been breached, but it’s very, very close.”

Cooling labor market

The cracks in the labor market are growing harder to ignore. Long-term unemployment has ticked higher over the past year, and more than 6 million people outside the labor force now say they want a job, up from roughly 5.7 million about a year ago, according to the BLS.

“This really feels like a jobs recession,” Zandi said. “Employment is flat to down. Output and incomes are still growing, but the economy is incredibly vulnerable. Nothing else can go wrong, or it could tip us into a full downturn.”

Investors are betting the slowdown will force the Fed’s hand. The yield on the 10-year Treasury note sank to a five-month low after the release as traders priced in multiple interest rate cuts before year-end. Zandi agreed the odds are high.

“We’ll definitely get a cut,” he said, adding that quarter-point moves in September, October, and December are likely. “Rate cuts will help cushion things, but they won’t save the economy. The die has been cast.”

Fed independence 

Zandi warned that the stakes for the Federal Reserve go beyond managing inflation and growth.

“I think the Fed desperately wants to avoid a downturn, because that will only increase the pressure on its independence,” he said.

If the economy slips into recession, he added, the central bank could face mounting political attacks, especially from a White House that has tried to reshape the Federal Reserve with recent moves, such as attempting to fire Fed governor Lisa Cook.

“That’s their number one priority now: keep the economy out of recession. It argues for lower rates despite the higher inflation that’s here and likely to come.”