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Investing.com -- Signs are mounting that the U.S. labor market is showing deeper cracks as Friday’s weak payrolls data pointed to broader weakness just around the corner. Jefferies economists flag three key warning signals: rising permanent job losses, a surge in young people dropping out of the labor force, and stubbornly high underemployment. Together, these trends suggest the Federal Reserve may need to consider a more aggressive rate cut, potentially echoing last year’s jumbo 50 basis point move.

Nonfarm payrolls increased by just 22,000 jobs in August, far below expectations, while the unemployment rate rose to 4.3% from 4.2% the prior month. While the headlines number show "little sign of slack building to the point that warrants significant concern... a deeper read into some of the underlying details of the Household Survey show more concerning signs of weakness than the headline data," Jefferies economists warned in a recent note.

1. Equilibrium labor market masking major struggles for job seekers

The ’no-hire/no-fire,’ which refers to a labor market situation where employers are neither hiring many new workers nor firing many existing employees, "looks like ’equilibrium’ or ’balance’ if you have a job, but if you don’t have a job, it looks terrible," they said, underscoring the serious struggles for job seekers. For those who are unemployed or trying to enter the workforce, it means few new job openings are available, making it very difficult to find work.

For younger workers aged between 20 to 24 years, the unemployment rate climbed to 9.1% in August, and if those who have left the labor force but want jobs were included, the rate would jump to a concerning 12.7%, they added.

2. Permanent job losers on the up, and up.

The challenges of finding a new job is making a dent on job stability. The percentage of permanent job losers as a share of the labor force has increased to 1.1% from 0.7% in mid-2022, signaling that more workers are facing long-term unemployment. While the broader U-6 unemployment measure, which includes discouraged and underemployed workers, rose to 8.1% in August, substantially above its cycle low of 6.6% from December 2022 and the highest level over this time as well.

3. Unemployment rate steady, but underemployment raises concerns

Although the headline unemployment rate appears relatively stable, signs point to a labor market where many workers remain underemployed or discouraged. The slowdown in hiring since mid-year reflects deeper structural challenges, including aging demographics, reduced immigration flow, deportations, and growing automation through AI. These factors are constraining new job creation and limiting full-time opportunities, leaving many workers stuck in part-time or less stable roles.

These underlying weaknesses, Jefferies cautions, justify a Federal Reserve rate cut-- or even a jumbo one at the Fed’s Sept. 16-17 meeting should the inflation data next week cooperate. While the odds of 50bps rate cut climbed, the prospect remains unlikely with just 8% of traders expect a jumbo cut this month, according to Investing.com’s Fed Rate Monitor Tool.

“There is no argument against a 25 basis point rate cut in September at this point,” Jefferies said. "Fed officials probably ought to consider the downside momentum that is already present in many pockets of the labor market, and make a bigger cut with more dovish guidance," it added.