August jobs report expected to be ‘key’ factor in Fed’s upcoming rate cut (video)

The eagerly awaited August jobs report is expected to be the latest evidence that the U.S. labor market is slowing as investors wonder whether a further cooldown will prompt a bigger interest rate cut from the Federal Reserve within two weeks.

The Bureau of Labor Statistics’ monthly report, due at 8:30 a.m. ET on Friday, is expected to show that nonfarm payroll jobs rose by 165,000 in August while the unemployment rate fell to 4.2%, according to a consensus estimate compiled by Bloomberg.

The July jobs report was much weaker than expected. The U.S. economy added just 114,000 jobs, while economists had expected 175,000. Meanwhile, the unemployment rate unexpectedly rose to 4.3%. That combination sent Wall Street into its worst downward spiral of the year before it rebounded throughout the rest of August.

Here are the key numbers Wall Street will be watching on Friday morning compared with the previous month, according to Bloomberg data:

• Nonfarm payroll employment: +165,000 compared with +114,000 in the previous year

• Unemployment rate: 4.2% compared to 4.3% in the previous year

• Average hourly earnings, month-on-month: +0.3% vs. +0.2% in the previous period

• Average hourly earnings year-on-year: +3.7% vs. +3.6% last year

• Average hours worked per week: 34.3 compared to 34.2 in the previous period

A key question coming out of Friday’s report will be whether August’s data confirms the cooling seen in July or shows that the previous report exaggerated the developing weakness in the labor market.

“Amid rising concerns about the health of the labor market, the August employment report should provide some reassurance,” Lydia Boussour, EY senior economist, wrote in a note announcing the event. “But it will also confirm worsening labor market conditions. We expect another below-trend wage increase of 145,000 jobs as business leaders continue to strategically manage their workforces in a slower final demand environment.”

At the heart of Friday’s report is the debate over how much the Fed should cut interest rates at its meeting later this month. During a speech in late August, Federal Reserve Chairman Jerome Powell said a cooling in the labor market was “undoubted” and added that the central bank “does not seek or welcome a further cooling in labor market conditions.”

Economists say Powell’s rhetoric means the weekly jobs report for August, due Friday, could prompt the Fed to cut rates by 50 basis points at its September meeting.

“The August employment data will be a key factor in determining whether Fed officials are likely to begin their rate-cutting cycle with a 50-basis-point cut or a 25-basis-point cut in September,” Citi economist Veronica Clark wrote in a note to clients. “Even if the unemployment rate falls modestly, data from one month after many months of gains may not convince Fed officials (or us) that there are no asymmetric risks to further increases, and lower wage employment could prompt Fed officials to cut rates by 50 basis points in this case.”

Clark and other economists say further signs of a cooling labor market this week have already helped justify a more decisive Fed rate cut.

The ADP National Employment Report for August showed that U.S. private payrolls added 99,000 jobs during the month, well below economists’ estimates of 145,000 and fewer than the 122,000 jobs added in July. The August data marked the fifth straight month in which wage gains fell from the previous month. Meanwhile, data released Wednesday showed that July ended with the lowest number of job openings in the U.S. labor market since January 2021.

The data has markets pricing in a 39% probability that the Fed will cut rates by 50 basis points by the end of its September meeting, according to the CME FedWatch tool.

From an equity perspective, strategists are not entirely confident that a weak jobs report justifying further monetary easing by the Federal Reserve will be a positive catalyst for stocks.

“I think if tomorrow’s data is tepid or mild compared to expectations, there will be a negative market reaction and likely further selling of a lot of these megacap names that have gotten us to this point,” Liz Young Thomas, head of investment strategy at SoFi, told Yahoo Finance.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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