Investors and economists alike will be fixated on Friday’s release of US jobs data for August. It is supposed to be announced this Friday, and hope is bubbling over. As a result, this report is sure to deliver critical perspective on the high demand for workers today. It arrives against the backdrop of the US economy having gained, rather, laid off close to 41,000 jobs in July. The ramifications of this data are significant, likely affecting Federal Reserve action on interest rates and monetary policy.
Analysts largely have their eyes on two especially important elements of the August report. First, it can be worrisome as a sign that perhaps a further deterioration in labor market conditions is on the way. The integrity of that data is now under threat. This alarm was raised in light of President Trump’s recent firing of the head of the Bureau of Labor Statistics (BLS). These factors have combined to produce an environment of ambiguity that will unquestionably affect market responses.
Job Market Trends and Expectations
That’s because the first July jobs report sent massive shockwaves through the financial markets. It effectively undermined President Trump’s argument that his economic record is strong. The unemployment rate is expected to increase from 4.2% to 4.3% in August. This imminent downturn in labor market conditions is deeply concerning to all major stakeholders.
Economists were expecting nonfarm payroll growth of just 78,000 jobs. This figure is well shy of the 100,000 threshold usually considered an indicator of a healthy labor market. If realized, this expected number would be a reassuring sign that the job market is not cracking significantly. Worst of all, it will help curtail consumer spending and thus economic growth.
These recent trends paint a picture of a labor market that is still struggling to find its footing. The early decline in employment seen in July was not an aberration. It is important because it signals a renewed commitment to inclusive hiring practices in the public, philanthropic and private sectors. Businesses are already seriously reconsidering their workforces in reaction to cost pressures and an unclear economic future. The August report will provide the essential data points to assist them in navigating this rapidly changing landscape.
Federal Reserve’s Response to Labor Market Developments
In recent comments, Federal Reserve Chair Jerome Powell admitted that balance of risks is moving the other way, and is moving toward the labor market. He noted that inflation risks still seem tilted to the upside. Simultaneously, he made clear that the employment risks are more and more leaning to the downside. This has led many to question whether the current economic recovery is sustainable. These fears are fueled by continuing strife in the labor market.
If the August jobs report confirms ongoing weakness in employment figures, it could bolster expectations for a rate cut during the Fed’s September meeting. Analysts think this outcome would lead to a re-ignition of discussions around a 3rd cut – possibly of 25 bps. We hope this conversation happens this fall. The Fed is preparing for all eventualities. It’s addressing a challenging macroeconomic landscape that’s being influenced by both domestic and international factors.
This keeps the dollar index well within its broader, but mild, uptrend. Robust August jobs figures might just give her the cover she needs to execute those widely expected cuts. Such a leveling-off of the labor market would likely make currency markets more jumpy. Investors will recalibrate their expectations based on what new data continues to roll in.
Broader Economic Indicators to Watch
In addition to the labor market report, key economic indicators including inflation and economic growth will be released in coming days. These changes will make for a much more complete picture of the US economy. The ISM manufacturing gauge to be released on Sunday should show us an early glimpse into activity and which sectors are faring better than others.
The ADP employment report is pushed back to Thursday due to Labor Day on Monday. This delay will provide more clarity as to the net creation (or destruction) of private sector jobs. That’ll be followed by factory orders and the Job Openings and Labor Turnover Survey (JOLTS) on Wednesday. These reports will flesh out a fuller economic narrative just in time for Friday’s all-important jobs report.
In addition to these domestic reports, international data will provide a useful comparison. And coming up on Tuesday, we’ll get the flash estimate for the August Eurozone Consumer Price Index (CPI). According to analysts the headline rate will remain unchanged at 2.0% y-o-y. This valuable information can help everyone understand the nature of global inflationary trends and how they might relate to US monetary policy.