Andreypov | Istock | Getty Images
Wall Street is preparing for the Labor Department’s jobs report on Friday, one of the most important economic releases this year, which is expected to play a major role in determining the future of Federal Reserve policy.
According to Dow Jones, the Wall Street consensus is for nonfarm payrolls to increase by 161,000 in August and the unemployment rate to fall slightly to 4.2%.
However, recent data, including a large downward revision from the previous figure, indicates a sharp slowdown in hiring, posing downside risks to that forecast.
Meanwhile, markets are confident that the Fed will begin cutting interest rates within the next few weeks, and depending on the results of its report on Friday, that could be significant.
“The labor market is cooling more rapidly than initially thought, and that’s [Friday’s report] “The question is, how will the Fed respond? How will they adjust interest rates? That’s why we’re having this conversation.”
While job growth has been trending downward through 2024, the market was made painfully aware of the slowdown in hiring when payrolls added just 114,000 jobs in July. It’s not even the lowest figure this year, but the Fed meeting after meeting has heightened the belief that the central bank is getting too complacent about a weakening economy and could keep interest rates high for a long time.
That was followed by a series of reports suggesting that while the economy was still recovering, hiring was slowing, manufacturing was shrinking further, and that it might be time for the Fed to start cutting interest rates before overdoing it on inflation and risking tipping the economy into recession.
The latest bad news arrived on Thursday, when payroll company ADP reported private sector payroll growth of just 99,000 in August, the smallest increase since January 2021.
Considering the Fed’s next move
“If the Fed doesn’t ease monetary policy and continues to be too aggressive for a long period of time, it could lead to a big ‘R,’ and we don’t even want to say that word,” Santangelo said, referring to a “recession.” “If, by God’s grace, this leads to an economic downturn, all the blame will be on the Fed.”
As a result, markets are expecting the Fed to cut interest rates by at least 0.25 percentage points, with a 0.5 percentage point cut becoming more likely, when it next meets on Sept. 18. The Fed has not cut interest rates by 0.5 percentage points since its emergency rate cuts at the start of the COVID-19 pandemic.
Futures trading shows traders are pricing in a series of cuts that would slash the federal funds rate by about 2.25 percentage points through 2025. The benchmark overnight borrowing rate is currently targeted at a range of 5.25% to 5.5%.
This aggressive monetary easing not only signals an effort to normalize interest rates from 23-year highs, but also reflects the deepening recession. In the short term, however, rate cuts will likely be aimed at a labor market still reeling from the effects of the COVID-19 pandemic.
While Monster’s job search data is still heavily skewed towards currently thriving healthcare-related roles, the most common search terms are “work from home,” “part-time” and “remote,” reflecting the shift to a hybrid environment.
Santangelo said that even though the gap between job openings and available work has narrowed sharply to about 1.1 to 1 from 2 to 1 a few years ago, there is still a large skills gap in the labor market.
“The jobs that are being created are not necessarily suited to the people who are being laid off. There is still a big skills gap, and nowhere is that more evident than in the health care sector,” he said. “What jobseekers are looking for most is flexibility. There is that gap between employers and jobseekers.”
Job seekers’ concerns
Meanwhile, workers are becoming more pessimistic about the current state of the labor market.
The Zeta Economic Index, which uses artificial intelligence to track a range of economic indicators, shows that concerns about employment are growing even as the overall economy remains strong.
A measure of job market sentiment fell 1% in August and 4.6% from a year ago, according to Zeta data. The index’s “new jobs index” fell 9.9% from the previous month, reflecting concerns about job security.
“The economy is resilient, but concerns about the job market persist. Weakened employment sentiment and mixed consumer behavior point to continued cautiousness in the workforce,” said David Steinberg, co-founder and chairman of Zeta Global, which compiles the index. “While the economy is showing signs of a ‘soft landing,’ persistent caution about job security continues to dampen overall economic optimism.”
The Zeta data mirrors recent Conference Board poll results, which showed a sharp narrowing of the gap between respondents who said it is easy to find a job and those who said it is difficult to find a job.
Markets will also be paying close attention to the wages section of Friday’s data, although wages have become less of an issue recently as inflation has eased.
Average hourly earnings are expected to increase 0.3% from the previous month and 3.7% from a year earlier, both of which are up 0.1 percentage points from July.
