The most important non-farm payroll data: 25 or 50, we'll see tonight!

The August non-farm payroll report released tonight may be one of the most important U.S. non-farm reports in years. This report will not only be a decisive factor for the Fed's September interest rate decision, but also provide key clues as to whether the world's largest economy is entering a recession.

At 20:30 Beijing time, the U.S. Bureau of Labor Statistics will release the August non-farm payroll report. According to a survey by Bloomberg economists, the consensus expectations are:

The number of new non-farm jobs in August is expected to reach 165,000, a significant increase from July's 114,000;

The unemployment rate is expected to decrease from 4.3% to 4.2%, marking the first decline since March this year; and the year-on-year growth rate of hourly wages is expected to rise from 3.6% to 3.7%.

Wall Street expects that if the August non-farm payroll data is strong, there will be a 25 basis point rate cut in September, but if the data is weak or the unemployment rate surges, the rate cut could be 50 basis points.

Furthermore, if the upward trend in the unemployment rate in August continues from July, analysts may become increasingly concerned that the U.S. may be in the early stages of a recession or on the edge of one. However, if the unemployment rate decreases or remains stable as predicted by Wall Street, the soft non-farm data in July may be seen as a false alarm.

Whether the U.S. is in a recession depends on the unemployment rate

The unemployment rate will be the highlight of tonight's non-farm report, providing key clues as to whether the U.S. 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 pre-pandemic levels in 2020. More importantly, the July unemployment rate triggered the Sam rule, leading to widespread recession panic.

If the upward trend in the unemployment rate in August continues from July, analysts may become increasingly concerned that the U.S. may be in the early stages of a recession or on the edge of one. However, if the unemployment rate decreases or remains stable as predicted by Wall Street, the soft non-farm data in July may be seen as a false alarm.

A significant and rapid increase in the unemployment rate rarely occurs outside of an economic recession, which is why the recent rise in the unemployment rate has attracted so much attention.

Other signs of a slowdown in the labor market have exacerbated recession concerns. After soaring in 2021 and 2022, job vacancies have been steadily declining and are approaching pre-pandemic levels.

However, some analysts believe that the job market has not collapsed, but is returning to normal after strong growth in labor demand. For example, the surge in non-farm unemployment in July is mainly due to temporary factors such as immigration, hurricanes, and extreme heat.

Goldman Sachs' Chief U.S. Economist David Mericle believes that the job market will improve, **labor demand is returning to normal after a very hot period, but it will not freeze completely, "It looks more like 2019, and stronger than 2022

"Although the number of unemployment benefit applicants has risen slightly, it remains at a low level. According to data from Goldman Sachs, the issuance of WARN notices warning of large-scale layoffs has not increased significantly.Claudia Sahm, the creator of the Sahm rule and chief economist of New Century Advisors, also believes that **the U.S. economy is not in a recession**. The increase in the unemployment rate is partly due to many new entrants into the job market who take a longer time to find work.According to Goldman Sachs' latest outlook report, non-farm payroll employment in August increased by 133,000, lower than the market's general expectations and slower than the previous value.Goldman Sachs pointed out that the reasons for the slowdown in employment mainly include: historical August data tend to deviate, job vacancy indicators outside of JOLTS (July job openings decline) remain high, and the impact of U.S. worker strikes continues. However, Goldman Sachs also stated that improved extreme weather conditions are favorable for a rebound in the job market.## 25 or 50, August Non-Farm Payrolls "Decisive"Given the established trend of slowing inflation, coupled with recent statements from senior officials at the Federal Reserve, a rate cut in September is almost certain. The biggest current disagreement lies in whether the rate cut will be 25 basis points or 50 basis points. The CME Group's FedWatch tool shows probabilities of 41% and 59% for each respectively.![](https://wpimg-wscn.awtmt.com/7500749e-f2c2-4ff3-b8d8-f7af58c5c978.png)Overnight, the ADP employment report, known as the "mini non-farm payrolls," unexpectedly hit a three-and-a-half-year low, fueling expectations of a 50 basis point rate cut. Some analysts believe that the Federal Reserve must cut rates more quickly to prevent further deterioration in the labor market.The Federal Reserve's focus has now shifted entirely to employment. Therefore, as the most important indicator of the U.S. labor market, the August non-farm payrolls report is likely to seal the fate of the September rate cut. **It is widely predicted that if the August non-farm payroll data is strong, there will be a 25 basis point rate cut in September, but if the data is weak or the unemployment rate spikes, the rate cut could be 50 basis points.**In this regard, the Goldman Sachs bond trading team wrote:> - If the unemployment rate falls to 4.19% or lower, as long as the new job data is positive, there is a chance of a 25 basis point rate cut in September.> - If the unemployment rate remains between 4.20-4.29%, a rate cut of 25 basis points in September is possible if new job additions exceed 150,000, and a rate cut of 50 basis points if it is below 150,000.> - If the unemployment rate remains at 4.30% or higher, there will be a 50 basis point rate cut in September.At the Jackson Hole Global Central Bank Conference, Federal Reserve Chairman Jerome Powell stated, "Now is the time for policy adjustments," with a focus on the labor market, especially after the July employment report was released, adding, "We are neither seeking nor welcoming further cooling of the labor market."It is worth mentioning that Friday is also the last day before the Federal Reserve's quiet period begins, during which public communication is allowed. New York Fed President John Williams and Fed Governor Christopher Waller will deliver speeches after the non-farm payrolls report on Friday, providing the market with the final opportunity to price in the September rate decision."

Founder of research firm MacroPolicy Perspectives, Julia Coronado, stated:

(August non-farm payrolls) are very important. This will set the tone for the Federal Reserve and also set the tone for global monetary policy and markets.

Markets are on high alert!

According to a report by Morgan Stanley, the impact of the August non-farm payroll report on the market depends on the data on job growth in the report. As per the report released by Morgan Stanley's market intelligence team:

• If the number of new jobs exceeds 300,000, it falls into the tail risk scenario, the market may discount rate cut expectations, leading to an increase in U.S. bond yields, putting pressure on risk assets.
• If the number of new jobs is between 200,000 and 300,000, it will boost market confidence in economic prospects, potentially driving the S&P 500 index up by 1% to 1.5%.
• If job growth is between 150,000 and 200,000, it largely meets market expectations, and if the unemployment rate does not continue to rise, the S&P 500 index may rise by 0.75% to 1.25%.
• If job growth is between 50,000 and 150,000, the market will worry about an economic recession, and the market may quickly reach a consensus on a 50 basis point rate cut in September, potentially causing the S&P 500 index to fall by 0.5% to 1%.
• If job growth is below 50,000, it also falls into the tail risk scenario, the market may believe that the U.S. has entered a recession, and may even begin to anticipate a 75 basis point rate cut in September, causing the S&P 500 index to fall by 1.25% to 2%.

Morgan Stanley expects that if the employment data meets expectations, the market may rise due to the heating up of rate cut expectations. Due to the Federal Reserve's previous misjudgment of inflation as temporary, they are now more likely to consider cutting rates early when assessing the risks of economic recession or a resurgence of inflation