The Fed’s latest projections and recent public comments suggest the overall economy will remain solid, but the job market is expected to weaken and become a growing concern.

Federal Reserve Chairman Jerome Powell acknowledged this week that there are “tensions” and said jobs data in the coming months, rather than other economic indicators, “may be a more real-time reflection” of how the economy is evolving.

First up is Friday’s September nonfarm payrolls report, which could be a big factor in whether what Powell called his “base case” of 25 basis point rate cuts at the Fed’s two remaining meetings this year remains intact, or if the discussion tilts toward bigger cuts or even a pause if job growth unexpectedly slows or even if wages unexpectedly surge.

When they cut rates by 50 basis points in September, Fed officials said their view of risks to the economy had shifted toward a higher-than-expected unemployment rate. Twelve Fed officials saw an "upside" risk to that reading, compared with just four officials in their June forecasts. Only three officials saw a significant risk of a sharp rise in inflation.

Friday’s nonfarm payrolls report will give the market an idea of ​​whether those risks are being realized. In addition, investors will be keeping a close eye not only on headline data such as the unemployment rate and job creation, but also on details such as wage growth and the number of long-term unemployed, which has been rising, suggesting more difficult conditions for job seekers.

Is “economic resilience” at risk?

In a study by Evercore ISI last week of economic forecasts released after the Fed’s Sept. 17-18 meeting, former Fed chief economist John Roberts said the rate cuts, coupled with a rise in unemployment expectations (however small), “suggest that the resilience of the U.S. economy that had been shown before June, namely that it remained strong despite higher interest rates, has largely disappeared.”

Roberts wrote that risks are tilted toward a worse outcome rather than a better one, and that, all else being equal, the Fed's new policy rate of 4.75%-5.00% could weigh on the economy more than expected.

Atlanta Fed President Raphael Bostic said in an interview this week that he would view it as evidence that the Fed may need to cut interest rates more quickly if monthly net payrolls fall well below 100,000, a number he considers to be about the balance rate needed to create jobs for new entrants into the labor market.

Ufuk Akcigit, an economics professor at the University of Chicago, said the trends he was observing were worrying — job growth was falling even as business revenues remained stable.

Small business payrolls fell by nearly 5,000 from August to September, continuing a downward trend that suggests businesses have become more anxious. “Given how fragile the environment is, hiring someone is a big decision,” he said. “Businesses have become more risk-averse.”

Economists expect U.S. employers added 140,000 jobs last month.

Bostic said he was in no "rush" to cut rates, but the central question has become "Is the economy still creating net new jobs? ... What is the total volume? What is the situation?"

He said the "steady-state" level of job growth was difficult to estimate given uncertainty over issues such as immigration, and a figure below 100,000 would raise "another level of questioning to what extent is this an anomalous reading ... or does it point to something more fundamental?"

Bostic said he will also look at how many industries are adding jobs and "see if it's broad or concentrated in one particular industry?"

Unemployment rate in equilibrium?

By many measures, the current U.S. unemployment rate of 4.2% is pretty good, which Federal Reserve policymakers believe is particularly important given the speed and magnitude of the decline in inflation, as sharp declines in price pressures are typically associated with slow economic growth or outright recession and high unemployment.

The unemployment rate as of August is well below the 5.7% average since the late 1940s. Importantly for the Fed, the unemployment rate is now right at the level that the median Fed policymaker believes is consistent with its long-term goal of 2% inflation.

But unemployment has also risen steadily over the past year. That’s enough to trigger some reliable recession indicators. And according to the Fed’s own forecasts, unemployment will continue to rise to some extent.

Historically, the picture on this front is not good. Once the increase in the unemployment rate exceeds half a percentage point in a year, it tends to continue to rise sharply. Policymakers will keep this in mind when reviewing the latest data.

“The unemployment rate is not bad, but the trend line is not good,” said Richmond Fed President Thomas Barkin. It’s an open question whether the unemployment rate is stabilizing at an “appropriate level,” where it will hover around what is considered sustainable month after month, or is about to break through that level and continue to rise.

Most investors currently expect the Fed to cut its benchmark interest rate by another 25 basis points at its Nov. 6-7 meeting, and Friday’s data could confirm or begin to change that expectation.

“Every meeting, we get one or two new jobs reports, one or two new inflation reports. If you’re right, your confidence grows. If the data comes out a different way, you can react accordingly.”

The article is forwarded from: Jinshi Data