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Wall Street is preparing for one of the most important economic data of the year on Friday, when the Labor Department releases a jobs report that is expected to largely determine the future of Federal Reserve policy.
Wall Street consensus is for nonfarm payrolls to increase by 161,000 in August and the unemployment rate to fall slightly to 4.2%, according to Dow Jones data.
However, recent data, including significant downward revisions to previous data, point to a sharp slowdown in hiring and pose some downside risks to this forecast.
In turn, markets are convinced the Fed will begin cutting interest rates within weeks, with the possibility of a significant rate cut depending on Friday’s report.
“The labor market is cooling faster than we initially knew, so that’s why (Friday’s report) is being questioned,” said Giacomo Santangelo, an economist at job site Monster. “What the Fed is going to do in response, how they’re going to adjust interest rates, that’s why we’re having this conversation.”
While job growth has been slowing for much of 2024, the slowdown was a deep blow to the market after July’s report showed job growth of just 114,000. That’s not even the lowest figure this year, but it comes after a Fed meeting that stoked sentiment that the central bank is too complacent about a weak economy and may keep interest rates high for a long time.
A flurry of reports followed suggesting that while the economy remained on solid footing, hiring was decelerating and manufacturing was shrinking further, suggesting it was time for the Fed to start cutting interest rates before risking overdoing the fight against inflation.
The latest bad news came on Thursday, with employment management firm ADP forecasting private sector job growth of just 99,000 jobs in August, the smallest gain since January 2021.
Consider the Fed’s next steps
“If they go too aggressive for a long period of time without easing monetary policy, that could lead to a huge ‘R,’ we don’t even want to say the word,” Santangelo said, referring to a “recession.” ”. “If God forbid this does lead to a recession, then all fingers will be pointed at the Fed.”
Therefore, the market expects the Federal Reserve to lower its benchmark interest rate by at least 25 percentage points at the end of its next meeting on September 18, and the possibility of a rate cut has increased. A reduction of half a percentage point. The Federal Reserve has yet to reduce its benchmark interest rate by half a percentage point since its emergency rate cut early in the outbreak.
Futures contracts show traders expect consecutive cuts in the federal funds rate by about 2.25 percentage points through 2025. The current target range for the benchmark overnight borrowing rate is 5.25%-5.5%.
Such an aggressive easing stance not only signals efforts to normalize interest rates from 23-year highs, but also reflects a deeper correction in the economy. From a more near-term perspective, however, a rate cut would be more targeted at a labor market still feeling the aftershocks of the COVID-19 pandemic.
The vast job search data remains heavily skewed toward health care-related positions that are booming in the current era, and the most common search terms are “work from home,” “part time,” and “remote,” reflecting the shift toward remote work.
Santangelo said there is still a huge skills gap in the labor market, although the gap between open positions and available workers has narrowed dramatically, from about 2 to 1 a few years ago to about 1.1 to 1.
“The jobs that are being created are not necessarily going to be suitable for the people who are being laid off. We still have a huge skills gap. The easiest place to see that is in health care,” he said. “The number one thing job seekers are looking for is more flexibility. This gap also exists between employers and job seekers.”
Job seekers’ concerns
In turn, workers have become more pessimistic about labor market conditions.
this Zeta Economic IndexCompanies using artificial intelligence to track various economic indicators indicate that while the overall economy is still doing well, concerns about jobs are growing.
The labor market sentiment index fell 1% in August, down 4.6% from the same period last year. The indicator’s “New Movers Index” fell 9.9% this month, reflecting concerns about job stability.
David Steinberg, co-founder and chairman of Zeta Global, said: “Despite the resilience of the economy…job market concerns remain. Declining employment confidence, coupled with mixed consumer behavior, indicate continued caution in the labor market. “As the economy shows With signs of a ‘soft landing’ emerging, continued caution over employment stability continues to undermine broader economic optimism. “
The Zeta data reflects a recent Conference Board survey that showed a sharp narrowing in the gap between respondents who believe jobs are easy to find and those that are hard to find.
Markets will also be focused on the wages component of Friday’s report, although that has become less of an issue recently as inflation slows.
The market generally believes that average hourly wages will grow by 0.3% this month and 3.7% annually, both 0.1 percentage points higher than in July.
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