The August non-farm payrolls report to be released tonight may be one of the most important US non-farm reports in years. This report will not only "finalize" the Fed's September interest rate decision, but also provide key clues as to whether the world's largest economy is entering a recession.
Whether the United States is in recession depends on unemployment rate
The unemployment rate will be the highlight of tonight's non-farm report, providing key clues as to whether the United States is entering a recession.
As of July, the U.S. unemployment rate has risen from 3.4% in April 2023 to 4.3%, even higher than the level before the epidemic in 2020. More importantly, the unemployment rate in July triggered the Sam rule, causing recession panic to spread wantonly.
If the unemployment rate in August continues its upward trend in July, it would indicate that the U.S. may be in the early stages of a recession or on the brink of one. But if the unemployment rate falls or remains stable, the weak non-farm payrolls in July may be seen as a false alarm.
Large and rapid increases in unemployment rarely occur outside of a recession, which is why the recent rise in unemployment has attracted so much attention.
Other signs of a slowing labor market have fueled recession fears. After surging in 2021 and 2022, job openings have been falling steadily and are near pre-pandemic levels.
However, some analysts believe that the job market has not collapsed, but has returned to normal after strong growth in labor demand. For example, the surge in non-agricultural unemployment in July was mainly related to temporary factors such as immigration, hurricanes, and extreme high temperatures.
The job market will be fine, and labor demand is returning to normal after a very hot period, but it will not be completely frozen.
Jobless claims, while up, remain low, and WARN notices, which warn of large layoffs, have not yet increased significantly.
The U.S. economy is not in recession, and the rising unemployment rate is partly because many new people are entering the job market and taking a long time to find jobs.
In August, non-farm payrolls increased by 133,000, which was lower than market expectations and also slowed down from the previous value.
The main reasons for the slowdown in employment include: historical August data tends to be biased, and job vacancy indicators other than JOLTS (job vacancies fell in July) are high. However, the improvement of extreme weather is conducive to a rebound in the job market.
25 or 50, the August non-agricultural data is the final word
Given that the trend of slowing inflation has been established, coupled with the recent statements of senior Fed officials, a rate cut in September is almost certain. The biggest disagreement at present is whether to cut interest rates by 25 basis points or 50 basis points, with the probability of each happening being 41% and 59% respectively.
Overnight, the ADP employment report, known as the "small non-farm payrolls," unexpectedly hit a three-and-a-half-year low, raising expectations for a 50-basis-point rate cut. Some analysts believe that the Fed must cut interest rates at a faster pace to prevent the labor market from worsening.
The Fed's attention has completely turned to employment, so the August report of non-farm payrolls, as the most important indicator of the US labor market, is likely to be the final word on the extent of the September rate cut. It is generally predicted that if the August non-farm payrolls data is strong, the interest rate will be cut by 25 basis points in September, but if the data is weak or the unemployment rate soars, the rate cut may be 50 basis points.
At the Jackson Hole global central bank conference, Fed Chairman Jerome Powell said "now is the time for a policy adjustment" with a focus on the labor market, especially after the July jobs report, adding that "we neither seek nor welcome further cooling in the labor market."
It is worth mentioning that Friday is also the last day for public communication before the start of the Fed's quiet period. New York Fed President John Williams and Federal Reserve Board member Christopher Waller will speak after the release of the non-farm report on Friday. This is the last opportunity for the market to price in the September interest rate decision.
The market is on high alert!
The impact of the August nonfarm payrolls report on the market depends on the employment growth data in the report.
If the employment data is in line with expectations, the market may rise on the expectation of rate cuts. Since the Fed previously misjudged that inflation was temporary, they are now more likely to choose to cut interest rates in advance when considering the risk of recession or re-inflation.
