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Wall Street is bracing for one of the most important economic data releases of the year on Friday, when the Labor Department releases a jobs report that is expected to play a major role in determining the future of Federal Reserve policy.
Wall Street consensus expects nonfarm payrolls to grow by 161,000 jobs in August and the unemployment rate to fall slightly to 4.2%, according to the Dow Jones Industrial Average.
However, recent data, including a massive downward revision to previous statistics, have pointed to a sharp slowdown in hiring, placing some downside risks to this outlook.
In contrast, markets are increasingly confident that the Federal Reserve will begin cutting interest rates within two weeks, with a significant cut possible depending on what Friday's report shows.
“The labor market has slowed faster than we were initially told, and that makes (Friday’s report) a question,” said Giacomo Santangelo, an economist at job search 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 through most of 2024, the slowdown weighed on the market with a July report showing payrolls growing by just 114,000 jobs. That wasn’t even the lowest number of the year, but it followed a Federal Reserve meeting that stoked sentiment that the central bank was too complacent about the economy’s weakness and could keep interest rates high for a long time.
What followed was a series of reports suggesting that while the economy is still on its feet, hiring is slowing, manufacturing is fading further into contraction, and that it is time for the Fed to start cutting interest rates before it risks overdoing its fight against inflation and dragging the economy into recession.
The latest bad news came on Thursday when payroll processing firm ADP put private payrolls growth in August at just 99,000 jobs, the smallest gain since January 2021.
Thinking about what the Fed will do next
“If they continue to tighten for too long, without loosening monetary policy, it could lead to a giant recession, and we don’t even want to say that word,” Santangelo said, referring to “recession.” “If, God forbid, that leads to an economic slowdown, all fingers will be pointed at the Fed,” he added.
Accordingly, markets are expecting the Fed to cut its benchmark interest rate by at least a quarter percentage point when it concludes its next meeting on September 18, with the odds of a half-point cut increasingly likely. The Fed has not cut its benchmark interest rate by a half-point since emergency cuts during the early days of the Covid-19 outbreak.
Futures indicate that traders are expecting a series of cuts that would lower 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%.
Such an aggressive easing stance not only signals an effort to normalize interest rates from their 23-year highs, but also reflects a deeper economic downturn. But in the more immediate term, the move lower will target a labor market still feeling the aftershocks of the Covid pandemic.
Monster's job search data continues to be heavily skewed toward healthcare-related jobs, which have boomed in the current era, while the most popular search terms are “work from home,” “part-time,” and “remote,” reflecting the move to a hybrid environment.
There is a significant skills gap in the labor market, Santangelo said, although the gap between open jobs and available workers has narrowed sharply, shrinking to about 1.1 to 1 from 2 to 1 two years ago.
“The jobs that are being created don’t necessarily fit 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 that job seekers are looking for is more flexibility. And there’s this kind of gap between employers and job seekers.”
Job seekers concerns
On the other hand, workers have become more pessimistic about the state of the labor market.
The Zeta Economic Index, which uses artificial intelligence to track various economic metrics, shows that job concerns are accelerating — even though the broader economy is still doing well.
Zeta figures showed the labor market confidence index fell 1% in August, down 4.6% from a year earlier. The index’s “new move index” fell 9.9% during the month, reflecting concerns about job stability.
“Despite the resilience of the economy… concerns about the labor market remain,” said David Steinberg, co-founder and chairman of Zeta Global, which compiles the index. “Lower business sentiment, coupled with mixed consumer behavior, points to continued caution in the workforce. With the economy showing signs of a ‘soft landing,’ continued caution about job stability continues to temper broader economic optimism.”
Zeta's data mirrors a recent Conference Board poll, which showed a sharp narrowing of the gap between respondents who said finding jobs was easy and those who said getting them was hard.
Markets will also be watching the wage component of Friday's report, although that issue has become less important recently as inflation has slowed.
The consensus is for average hourly earnings to increase 0.3% on a monthly basis and move 3.7% on a yearly basis, both 0.1 percentage point higher than in July.
