Why Today’s Workday Reporting Jobs Could Be Another Plus for the Fed.

Sep 01, 2023

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Employers are anticipated to have added fewer positions in August, and pay growth in workday reporting jobs are likely to have slowed, adding to the case that the still-strong labour market has begun to weaken in all the right ways.

According to FactSet consensus estimates, the US economy added 170,000 jobs in August, a decrease from the 187,000 new jobs added in July. Economists also predict that the unemployment rate will remain at a historically low 3.5%.

Any report that comes broadly in line with forecasts will show a solid labour market, with job growth continuing to fall from recent highs but still exceeding the amount required to keep up with population growth. It would raise the three-month average of nonfarm payroll growth in the United States to little more than 180,000, barely below the nearly 190,000 jobs gained on average in the year ending February 2020, right before the COVID epidemic began.

A weak August employment report would follow other statistics released earlier this week that showed an unexpected fall in job vacancies in July and a strong slowdown in the number of people quitting their jobs. Both of these events point to a decrease in labour demand, which might assist in rebalancing the labour market and lessen wage inflation pressures.

Economists estimate average hourly wages to have climbed by 0.3% in August, down from 0.4% in July, and to remain stable at a 4.4% annual growth rate.

In light of this, another monthly reduction in the number of jobs added might assist in confirming the perception that the unsustainably hot labour market is well on its way back to a pre-pandemic normal.

“The August jobs report will likely bring more evidence that the labour market is gradually cooling,” EY senior economist Lydia Boussour wrote. 

That will be encouraging news to the Federal Reserve, which has long sought proof that the labour market is slowing but not collapsing as it seeks to slow the economy and contain inflation.

Too much labour market strength may keep inflation high by raising employees’ pay and, as a result, their spending power. However, if job vacancies — a proxy for labour demand — continue to decline without a significant increase in the unemployment rate, this might imply an improved labour market balance, allowing inflation to return to the 2% target level.

During his address in Jackson Hole on August 25, Fed Chair Jerome Powell stated that the central bank expects the labour-market rebalancing to continue. However, any signals that labour-market tightness is no longer lessening may need a Powell-based monetary policy response.

According to that logic, an August workday reporting jobs in line with expectations should bolster the Fed’s assumption that rates would remain unchanged at its next policy meeting on September 19-20. However, an unanticipated burst in job creation or a larger-than-expected pay increase might tip the scales in favour of another increase.

Fed officials will also receive August inflation data before their next rate-hike decision. Although price growth has been cooling significantly, any surprises to the upside on that score could also push the central bank to consider a quarter-point increase.

According to Boussour, he and his colleagues continue to view the Fed retaining a restrictive policy stance and leaving policy unchanged through Q1 2024, albeit the door to future policy tightening will remain open if statistics support it.

The Labor Department will issue August employment figures on Friday at 8:30 a.m. EDT.

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