Expect strong U.S. jobs report for August, but the devil is in the details

We expect a net gain in total employment of 175,000 jobs and an unemployment rate of 4.2% when the U.S. jobs report is released on Sept. 6.

In addition, we expect average hourly earnings to increase by 0.3% on the month and for the year-ago figure to cool slightly to a 3.5% gain.

The key to any rebound in hiring in the establishment survey will be in the demand for workers in private education, health care, and leisure and hospitality.

Typically, education hiring rises in late summer as the school year approaches. Leisure and hospitality are also expected to gain after soft months in June and July.

Given the mild 114,000-job increase in July and the rise to 4.3% in the unemployment rate, investors and policymakers will be focusing on two key aspects of the report.

The first aspect will be if the seasonal noise that affected the July report fades and the series moves back toward the three-month average gain of 170,000 or the slightly stronger pace implied by the six-month average of 194,000.

We suspect that firms that hoarded workers for much of the past two years amid a shortage of labor are in no hurry to increase hiring given the modest cooling in demand across the economy.

Yet businesses are in no hurry to discharge workers either. We are forecasting an increase that is aligned with the more recent cooling in hiring over the past three months.

Read more of RSM’s insights on the economy and the middle market.

Second, we would advise investors to look closely at the August unemployment rate. Taken out to three decimal points, the unemployment rate in July was 4.253%, or 4.3% after rounding.

There is risk to the downside here linked to the seasonal noise that affected the household and establishment surveys. We think that the unemployment rate will fall back to 4.2% on the month based on our forecast of a 4.17% print.

The takeaway

More important, we think that investors and policymakers will be focusing the size of the likely rate cut at the Federal Reserve’s meeting on Sept. 18.

If the jobs report shows hiring below 100,000 with a rise in the unemployment rate, and if jobless claims increase while job openings deteriorate, then the Fed may lean toward a 50-basis point cut in the policy rate.

In our view, barring a significant downside surprise in the jobs report and a surge in layoffs, the Federal Reserve will reduce its policy rate by 25 basis points in September and continue to do the same at each meeting until it reaches what we think is the new neutral rate somewhere near 3.25%.