The August jobs report is the most eagerly awaited economic release of the week as investors watch closely for signs of a rebound in the US labor market following recession-like figures seen in July.
The July employment situation report revealed a significant slowdown in job creation: total nonfarm payrolls fell from 179,000 in June to just 114,000 in July, well below the 175,000 expected.
Adding to concerns, the unemployment rate unexpectedly rose from 4.1% to 4.3%, triggering the Sahm Rule, a well-recognized recession indicator that has successfully signaled every US recession since 1970.
In response to weak July data, the stock market experienced a sell-off, with the S&P 500, followed by the SDPR S&P 500 ETF SPYfalling 1.9% on the day as investors flocked to safe-haven assets, reducing risk exposure amid recession fears.
What can investors expect from the August jobs report?
Housewife rule: “This time is different”
Bank of America is forecasting an increase of 200,000 nonfarm payrolls for August, significantly higher than the average analyst expectation of 160,000, according to TradingEconomics.
The private sector is expected to add 170,000 jobs, with government contracting contributing an additional 30,000, according to Shruti MishraUS economist at the bank. He also expects both the unemployment rate and the labour force participation rate to fall by 0.1% to 4.2% and 62.6% respectively.
Mishra highlighted two key aspects of the weak July jobs report: “First, most of the increase in unemployed workers in July reflected temporary layoffs, likely driven by seasonal factors such as the volatility of auto restructuring in Michigan. Second, the number of workers not working due to bad weather increased from 59,000 in June to 436,000 in July,” he said.
Texas experienced the largest increase in this category, largely due to the impact of Hurricane Beryl.
While the rise in the unemployment rate in July triggered the stay-at-home rule, signaling a possible recession, Mishra said he is confident that “this time is different.” He notes that the stay-at-home rule was only triggered due to temporary, rather than permanent, layoffs.
Bank of America views the low payrolls figures for April and July as statistical anomalies, particularly given that the U.S. economy grew at an average annualized pace of 2.2% in the first half of 2024, the analyst said.
However, there is also room for caution. “We see two potential downside risks to our August payrolls forecast,” Mishra added. “The first is the impact of the California wildfires, and the second is that temporary layoffs starting in July could become permanent.”
Goldman Sachs ignores July recession signs
Goldman Sachs has also distanced itself from the rise in unemployment in July and its possible implications for a recession.
David MericleThe US bank's chief economist, Mark Zuckerberg, said that the current dynamics of the labour market do not indicate a recessionary spiral, but rather a normal weakening.
“We are clearly not seeing a layoff spiral, the rapidly evolving vicious cycle of job and income losses leading to reduced spending and more layoffs that would be difficult for policymakers to counter,” he said in a report.
Trend employment growth is currently hovering around 160,000 per month, while job openings remain slightly above pre-pandemic levels, Mericle said.
“It would be strange if labor demand suddenly weakened excessively because GDP is growing vigorously,” he said.
Goldman Sachs also expects signs of labor market weakness to be enough to prompt a gradual easing of interest rates. Mericle said he expects the Fed to implement consecutive 25-basis-point interest rate cuts in September, November and December, rather than the quarterly cuts originally planned.
The Goldman Sachs economist said he does not expect any 50 basis point rate cuts in the near term.
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