The upcoming August jobs report, scheduled for release on Friday, is anticipated to be one of the most crucial reports in years. Its findings could either alleviate or exacerbate concerns about a recession, especially after weak job growth in the previous month.

The job numbers may influence whether the Federal Reserve opts to decrease its main interest rate by a quarter percentage point this month as expected, since inflation is nearing the central bank’s 2% target. Alternatively, if the economy and job market appear unstable, the Fed might consider a more substantial half-point reduction to prevent a downturn.

These employment figures are likely to significantly affect the already volatile stock market.

“This report will capture a lot of attention as one of the most viewed employment updates in a while,” noted economist Michael Reid from RBC Capital Markets.

What to expect from the US job report?

According to a Bloomberg survey, economists are hopeful for a recovery from the disappointing figures of July, with predictions of employers adding 165,000 jobs and the unemployment rate decreasing to 4.2%.

July’s job statistics were dismal, but many experts believe this misrepresents the expected post-pandemic slowdown in job growth. Only 114,000 jobs were added, falling short of the anticipated 175,000, while the unemployment rate rose from 4.1% to 4.3%, the highest level since October 2021.

What caused the decline in job market in 2024?

Analysts attribute July’s unusually poor performance to several unique factors.

Hurricane Beryl struck Texas in early July. While the Department of Labor minimized the storm’s impact on employment, the number of individuals absent from work due to weather conditions surged from 59,000 in June to 436,000 in July, significantly exceeding the pre-pandemic average of 33,000, according to a Bank of America report. Beyond Texas, Beryl caused tornadoes across states like Louisiana, Arkansas, Kentucky, and New York, as highlighted by Reid.

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Additionally, auto manufacturers tend to pause operations in the summer for equipment upgrades, leading to temporary layoffs. Although the Labor Department adjusts the employment figures seasonally, this year’s layoffs may have occurred later than usual, creating distortion in the seasonal adjustments, according to Reid.

Moreover, a significant software issue at many U.S. auto dealerships hindered new car orders, likely affecting their staffing negatively, Reid added.

In total, temporary layoffs spiked by an astonishing 249,000 in July, a rise that Morgan Stanley suggests accounts for a large part of the increase in the unemployment rate.

Morgan Stanley anticipates a bounce back with 25,000 jobs in Texas thanks to recovery from the storm, 8,000 from returning auto workers, and 25,000 due to a slowed job growth in sectors like professional services and information technology, predicting an overall increase of 185,000 jobs.

What implications does the jobs report have?

A second consecutive weak jobs report could reinforce the perception that the Federal Reserve has maintained interest rates too high for an extended period—currently sitting at a 23-year peak of 5.25% to 5.5%—thus increasing recession risks.

But what level of weakness is too concerning?

Job growth has slowed down as the effects of recovery from the COVID-19 crisis wane, and the Fed’s elevated interest rates aimed at curbing inflation are beginning to slow business hiring and investments. The Fed is seeking a cooler job market to support further inflation reduction.

Since April, job growth has averaged 170,000 per month, down from 227,000 in the year’s first four months and 251,000 in 2023. Moody’s Analytics projects this average will decrease to 100,000 by early 2025 and further decline to 50,000 by the end of that year. Additionally, job openings dropped to 7.7 million in July, marking the lowest level since January 2021, indicating a potential cooling of the market ahead.

What is causing the rising unemployment rate in the US?

Moreover, the unemployment rate has risen by half a percentage point over the past year, based on a three-month average—leading some to suggest that the U.S. might be facing a recession. However, economists assert this situation is different, as the rise in unemployment stems from an influx of immigrants into the workforce, many still seeking jobs, rather than widespread layoffs.

Nonetheless, a continuing uptick in unemployment means that job seekers may find it more difficult to secure positions, which could lead to reduced consumer spending and further harm the economy.

What interest rate cuts can we expect from the Fed?

Jason Ware, chief economist and investment officer at Albion Financial Group, believes that the Fed is unlikely to reduce its key interest rate by more than a quarter point unless August job gains fall below 100,000 and the unemployment rate further increases.

Reid suggests that a half-point rate cut could become a possibility.

If the unemployment rate climbs to 4.4%, it raises concerns. However, the Federal Reserve (Fed) may be reluctant to cut interest rates significantly if job growth remains strong, particularly if new jobs are consistently over 100,000 each month. This reluctance is further complicated by the potential perception that lowering rates too close to an election could be a strategy to benefit the current party by stimulating the economy.

Futures markets are predicting an initial quarter-point rate decrease this month, with a total reduction of one percentage point expected this year, followed by several more quarter-point cuts anticipated in 2025.

What’s going on with the stock market?

Following disappointing job statistics from July, the markets experienced a downturn due to recession fears. However, recent positive economic indicators, particularly in retail sales, have brought some recovery. Unfortunately, the markets took a hit again after recent reports showed that manufacturing has decreased for five consecutive months in August.

According to Ware, a job report that meets expectations could alleviate recession concerns. Conversely, a weak report—such as one showing around 130,000 new jobs—might reignite fears and unsettle investors again, he warned.

How do markets respond to rate cuts?

Typically, markets respond favorably to rate cuts, as they tend to energize the economy and lead investors to transfer their funds from bonds with lower returns to stocks. Rate hikes, on the other hand, are usually met with disapproval. During the Fed’s insistence on raising rates aggressively in 2022 and 2023, strong job reports that were typically seen as positive were instead interpreted as negative indicators since they could suggest rising inflation and the chance of additional rate increases.

However, Ware emphasized that a disappointing jobs report this Friday indicating potential recession risks might overshadow any favorable market responses anticipated from larger rate cuts.

“Unfortunately, bad news means bad news again,” states Ware.