The August jobs report is the most anticipated economic release this week, as investors closely watch for signs of a rebound in the U.S. labor market. July’s report revealed a significant slowdown in job creation, with total nonfarm payrolls dropping from 179,000 in June to just 114,000 in July, far below the expected 175,000. This slowdown was accompanied by an unexpected rise in the unemployment rate from 4.1% to 4.3%, triggering the Sahm Rule, a well-known recession indicator that has accurately signaled every U.S. recession since 1970. This weak data caused a sell-off in the stock market, with the S&P 500 dropping 1.9% as investors sought safe-haven assets amidst growing recession fears.
What can investors expect from the August jobs report?
Bank of America forecasts an increase of 200,000 nonfarm payrolls for August, significantly higher than the median analyst expectation of 160,000. The private sector is expected to add 170,000 jobs, with government hiring contributing an additional 30,000. The bank also anticipates a slight drop in both the unemployment rate and the labor force participation rate, to 4.2% and 62.6%, respectively. However, Bank of America acknowledges two potential downside risks to their forecast: the impact of the California wildfires and the possibility of temporary layoffs from July becoming permanent.
Despite the July report triggering the Sahm Rule, Bank of America’s economist, Shruti Mishra, believes this time is different. She argues that the rule was activated due to temporary layoffs, likely driven by seasonal factors like auto retooling volatility and weather events, rather than permanent job losses. The bank considers the low payroll numbers in April and July as statistical anomalies, given that the U.S. economy grew at an average annualized pace of 2.2% in the first half of 2024.
Goldman Sachs also downplays the significance of the July unemployment spike and its implications for a recession. The bank’s chief economist, David Mericle, believes the current labor market dynamics indicate a normal softening rather than a recessionary spiral. He points to the continued growth in job openings and the robust GDP growth as evidence that labor demand is not weakening excessively. Goldman Sachs expects the Federal Reserve to enact consecutive 25-basis-point interest rate cuts in September, November, and December, reflecting their confidence in the labor market’s resilience.
