Countdown! Non-farm payrolls are telling "ghost stories" again? Investors, beware of being scared!

The U.S. August non-farm payroll report to be released at 8:30 p.m. on Friday may become one of the most important economic data in recent years, with the results potentially easing or exacerbating concerns about economic recession sparked by last month's weak job growth.

This report will also determine whether the Federal Reserve will cut interest rates by the expected 25 basis points this month, as inflation has approached its 2% target. On the other hand, if Fed officials believe that the economy and labor market are experiencing significant turmoil, they may take more aggressive rate-cutting measures, lowering rates by 50 basis points to address potential economic recession.

This employment data may have a significant impact on the volatile stock market as well as commodities such as gold and the U.S. dollar. RBC Capital Markets economist Michael Reid stated:

"This will be the most watched employment report in recent times."

Non-Farm Payroll Report Expectations

According to a Bloomberg survey, economists generally expect a rebound in job performance following the weak report in July, with non-farm payrolls expected to increase by 165,000 and the unemployment rate expected to slightly decrease to 4.2%.

Previously, the employment data in July was overall weak, but most forecasters believe that this exaggerated expectations of a slowdown in job growth post-pandemic. The data from last month showed that non-farm payrolls increased by only 114,000, well below the expected 175,000, and the unemployment rate jumped from 4.1% to 4.3%, the highest level since October 2021.

Why Was the Job Market Weak in 2024?

Analysts point out that the main reasons for the weak employment data in July are related to some one-time factors.

In early July, Hurricane "Beryl" hit the state of Texas in the United States. Although the Labor Department downplayed the impact of the hurricane on employment, Bank of America noted that the number of people unable to work due to severe weather surged from 59,000 in June to 436,000 in July, far exceeding the pre-pandemic average of 33,000. In addition to the impact of Beryl on Texas, the hurricane also caused dozens of tornadoes in Louisiana, Arkansas, Kentucky, and New York.

Furthermore, auto manufacturing plants typically shut down in the summer for equipment upgrades, leading to temporary layoffs of workers who then return to work within a few weeks. While the Labor Department adjusted for these seasonal effects, this year's temporary layoffs seem to have occurred later than usual, potentially affecting the accuracy of seasonal adjustments.

Another factor that may have suppressed job growth in July is software malfunctions, which caused about one-third of U.S. car dealerships to be unable to sell new cars, potentially reducing their staffing levels.

Overall, temporary layoffs surged by 249,000 in July, with Morgan Stanley believing this was the main reason for the sharp increase in the unemployment rate.

Morgan Stanley expects job positions in Texas to rebound by 25,000 after the hurricane, recalls of auto workers to add 8,000 positions, as well as 25,000 positions from professional and business services, and the information industry's prior employment growth slowdown (involving the computer, communication, and film production industries) Research institutions expect total employment growth in August to reach 185,000 positions.

Importance of this Non-Farm Payrolls Report

However, if employment data remains weak for two consecutive months, it may fuel the market's belief that the Federal Reserve will maintain high interest rates for too long. Currently, the U.S. benchmark interest rate is at its highest level in 23 years at 5.25%-5.5%, which could increase the likelihood of an economic recession.

But how "weak" does employment data need to be to be considered bad?

With the fading effects of the post-pandemic labor market recovery and the increased pressure on business recruitment and investment due to the Fed's rate hikes to combat inflation, employment growth has been slowing down. Fed officials hope for a slowdown in the labor market to ensure that inflation continues to decline. Another report this week showed that job vacancies in July fell to 7.7 million, the lowest level since January 2021, indicating further cooling in the future.

Since April, employment growth has averaged 170,000 positions per month, lower than the 227,000 in the first four months of this year and 251,000 in 2023. Moody's Analytics predicts that by early 2025, employment growth will slow to an average of 100,000 positions per month, dropping to 50,000 by the end of 2025.

Why is the U.S. Unemployment Rate Rising?

Meanwhile, the three-month average unemployment rate in the U.S. has risen by 0.5 percentage points from its low point over the past year, triggering a rule indicating a possible recession in the U.S. - the Sam rule. However, economists say this time is different because the rise in the unemployment rate is mainly due to a surge in immigrants entering the labor market, many of whom are still looking for work rather than mass layoffs.

Nevertheless, the continued rise in the unemployment rate means it is becoming harder for the unemployed to find work, which is likely to lead to reduced spending and have adverse effects on the economy.

How Much Will the Fed Cut Interest Rates?

Jason Ware, Chief Economist and Chief Investment Officer at Albion Financial Group, said that unless employment growth in August falls below 100,000 and the unemployment rate further rises, he expects the Fed not to cut interest rates by more than 25 basis points.

Reed believes that if the unemployment rate rises to 4.4%, a 50 basis point rate cut will become a high probability event. However, he also stated that if the unemployment rate falls and employment growth remains at 100,000 or above, the Fed will be cautious about significant rate cuts. Especially as the presidential election approaches, the Fed may be criticized for favoring the ruling party by promoting the economy through rate cuts.

The futures market expects the Fed to see its first 25 basis point rate cut this month, with a cumulative rate cut of 1 percentage point this year, and several more 25 basis point cuts in 2025.

How is the Stock Market Reacting?

After disappointing July employment data led to market declines on recession concerns, there was a quick rebound following encouraging economic reports, especially retail sales data However, data released this week indicates that manufacturing activity in August contracted for the fifth consecutive month, causing the market to fall again.

Weil stated that if the employment report meets expectations, it may alleviate market concerns about a recession, but if the data weakens again, such as with employment growth of only 130,000, it may reignite concerns and scare investors once again.

How will the market react to a rate cut?

Generally, the market likes rate cuts because they can stimulate the economy and prompt investors to shift funds from low-yield bonds to stocks. The market dislikes rate hikes. During the aggressive rate hikes by the Federal Reserve in 2022 and 2023, strong employment reports are usually seen as bad news because they could signal rising inflation, increasing the likelihood of further rate hikes.

However, Weil pointed out that if Friday's employment report suggests that the economy may be heading into a recession, this will offset the positive impact of a rate cut on the market. At that point, "bad news is just bad news," Weil said