Right here's every little thing you’ll want to find out about Friday's large employment report
People line up as they wait for the JobNewsUSA.com South Florida Job Fair to open on June 26, 2024 at the Amerant Bank Arena in Sunrise, Florida.
Joe Raedle |
The US labor market is likely to have cooled somewhat in July, as a gradual economic slowdown and Hurricane Beryl are likely to have dampened hiring momentum somewhat.
Although the U.S. Labor Department's nonfarm payrolls report for July, due out at 8:30 a.m. Eastern Time on Friday, shows weaker employment, the decline is likely to be modest and consistent with the kind of soft shutdown the Federal Reserve is seeking.
“If the Fed wanted to do a soft landing, it would probably have looked like this,” said Mike Reynolds, vice president of investment strategy at Glenmede. “We see only modest weakness on the fringes of the labor market, which [isn’t likely to] out of control and get into a negative feedback loop.”
In fact, according to the department's Bureau of Labor Statistics report, job growth is expected to be 185,000 this month, compared to 206,000 in June. The unemployment rate remains at 4.1%, according to the Dow Jones consensus estimate. Labor market reports over the past year and a half have regularly topped consensus.
However, some economists say the report may be too optimistic. Goldman Sachs expects Beryl, which has hit much of Texas, particularly Houston, to drag down the number of jobs by 15,000. The firm expects the total gain to be 165,000. Citigroup predicts an even lower number – 150,000 employees and a slightly higher unemployment rate of 4.2%.
If the unemployment rate continues to rise, it could raise fears that the so-called Sahm rule could be triggered. This rule consistently states that the economy is in recession if the unemployment rate averages half a percentage point above the 12-month low over a three-month period. A year ago, the unemployment rate was 3.5% before it began to rise.
Optimism at the Fed
In the first half of 2024, an average of 203,000 new jobs were created per month. At the same time, the unemployment rate has increased as more workers have entered the labor market. The number of people who are considered unemployed but are looking for work or have been temporarily laid off has reached its highest level since October 2021.
Fed Chairman Jerome Powell noted on Wednesday that the previous imbalance between supply and demand in the labor market has almost been eliminated. The number of vacancies now exceeds the number of available workers by only 1.2 to 1. A few years ago, when inflation was at its peak, the ratio was 2 to 1.
If the factors continue to balance out and other inflation indicators show progress, Powell strongly suggested that there could be a rate cut in September.
“Our confidence is growing because we're getting good data,” he said at a press conference following the Fed meeting. “Frankly, the softening of labor market conditions gives us more confidence that the economy is not overheating.”
Markets will be watching Friday's numbers closely to see whether Powell's assessment of the labor market is correct – and whether the Fed is being too confident and waiting too long to cut interest rates.
There are growing calls on Wall Street for the Fed to start easing monetary policy now that most indicators suggest that inflation is just a stone's throw from the central bank's 2 percent target. DoubleLine CEO Jeffrey Gundlach, for example, told CNBC on Wednesday that he believes the economy is already on the brink of a recession.
“If we look back at today, … I believe that in September 2024 we will say we were in a recession,” he said.
Eyes on the returns
At its meeting, the Fed decided to keep its key interest rate for overnight money in the range of 5.25 to 5.5 percent, as it did last year.
Markets rallied on the news, but gave up those gains on Thursday after news that jobless claims rose last week and manufacturing fell further into recession.
“By waiting to cut rates today, the Federal Open Market Committee is betting that the labor market is strong enough to wait until the fall for confirmation that inflation is back up to 2%,” said Nick Bunker, North America economic research director at Indeed Hiring Lab. “Let's hope that pays off.”
As always, markets will also be keeping an eye on the average hourly earnings portion of the report for signs of underlying inflation.
The forecast assumes that profits rose 0.3% month-on-month and 3.7% year-on-year. If the latter is true, it would be the smallest profit increase since May 2021.
“Even if wage pressures unexpectedly stagnate or even accelerate slightly again in this report, we think the progress the Fed has made on inflation so far means there should still be an opportunity for the Fed to cut rates in September, as long as subsequent data releases (e.g. the July consumer price index) play along,” said BeiChen Lin, investment strategist at Russell Investments.
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