Wall Street is preparing for a significant economic release on Friday, as the Labor Department is set to publish a jobs report that is crucial in shaping the future of Federal Reserve policy. The consensus on Wall Street is that there will be nonfarm payrolls growth of 161,000 for August and a slight decrease in the unemployment rate to 4.2%, according to Dow Jones. However, recent data, including a substantial downward revision to previous counts, has indicated a notable slowdown in hiring, introducing some downside risk to the forecast.
As a result, markets are confident that the Federal Reserve will commence lowering interest rates in the coming weeks, with the potential for a substantial cut depending on the findings of Friday’s report. The labor market has cooled more rapidly than initially reported, prompting discussions on how the Fed will respond and adjust rates.
Job growth has been tapering off throughout much of 2024, with the deceleration becoming more apparent in the market following a July report showing payroll growth of just 114,000. This raised concerns after a Fed meeting suggested the central bank might be too complacent about the weakening economy and could maintain high interest rates for an extended period.
Subsequent reports have highlighted that while the economy remains resilient, hiring is slowing down, the manufacturing sector is further contracting, and the Fed needs to start cutting rates to prevent an overcorrection in its inflation fight that could lead to a recession. The most recent negative news came from ADP, which reported private job growth in August at only 99,000, the smallest gain since January 2021.
Market expectations are leaning towards the Fed reducing benchmark rates by at least a quarter percentage point at the conclusion of its next meeting on September 18, with the possibility of a half-point reduction increasing. Traders are anticipating a series of rate cuts that could reduce the fed funds rate by about 2.25 percentage points through 2025, as indicated by futures contracts.
This aggressive easing stance not only aims to normalize rates from their 23-year high but also reflects a deeper economic slowdown. In the short term, the rate cuts are primarily targeted at a labor market still grappling with the aftermath of the Covid pandemic. Job search data from Monster indicates a strong focus on health care-related positions, reflecting the current trend, with common search terms like “work from home,” “part-time,” and “remote” aligning with the shift to a hybrid work environment.
Despite a narrowing gap between job openings and available workers, there remains a significant skills gap in the labor market. Job seekers are increasingly seeking flexibility, highlighting a disparity between what employers offer and what employees desire. Workers are becoming more pessimistic about the labor market, as shown by the Zeta Economic Index, which tracks various economic metrics and indicates growing concerns about job stability.
The Zeta data is consistent with a recent Conference Board survey that revealed a diminishing gap between respondents who find jobs easy to secure versus those who find it challenging. Market observers will also pay attention to the wage component of Friday’s report, although it has become less of a concern recently due to moderated inflation. The consensus is for average hourly earnings to rise by 0.3% on the month and 3.7% year-over-year, both 0.1 percentage point higher than July.
