U.S. job growth in August likely cooled from a frenzied pace the previous month, but hiring probably remained solid despite growing headwinds from higher interest rates and scorching-hot inflation.
The Labor Department on Friday morning is releasing its closely watched August jobs report, which is projected to show that payrolls increased by 300,000 last month and the unemployment rate held steady at 3.5%, according to a median estimate by Refinitiv economists. That would mark a significant drop from the surprise gain of 528,000 recorded in July and would be the weakest monthly job growth since April 2021.
Meanwhile, average hourly wages are expected to rise 0.4% or 5.3% annually.
While monthly jobs data is always important, the Federal Reserve is closely watching this particular report for signs the labor market is starting to slow down from its torrid pace as policymakers try to wrestle inflation, which is still running near a 40-year high, back to 2%.
A hotter-than-expected figure on Friday could solidify another 75-basis-point interest rate hike when policymakers meet at the end of September. Officials already approved back-to-back three-quarter percentage point increases in June and July as they race to catch up with runaway inflation.
Stocks sold off ahead of the report's release, fearing that it could entail an even more hawkish move from the Federal Reserve.
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"A strong jobs number might actually be bad for risk markets as it may imply a more hawkish response from the Fed," said Brendan Murphy, head of global fixed income of North America at Insight Investment. "Conversely, a weak jobs number may imply a less aggressive Fed."
Fed Chairman Jerome Powell spooked the market last week with his keynote speech in Jackson Hole, Wyoming, during which he renewed the specter of an increasingly hawkish Fed that is determined to fight inflation, regardless of the potential economic fallout.
"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
That sentiment was echoed by other Fed officials this week, with New York Fed President John Williams warning that interest rates will likely remain elevated for some time. Cleveland Fed President Loretta Mester, meanwhile, signaled that she expects the benchmark rate to rise above 4% by early next year and dashed Wall Street's hopes for a rate cut in 2023.
"My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there," Mester said Wednesday in remarks prepared for an event organized by the Dayton Area Chamber of Commerce. "I do not anticipate the Fed cutting the fed funds rate target next year."
For months, the labor market has remained one of the few bright spots in the economy, with the economy adding more than 2 million jobs over the first half of the year. And earlier this week, the government reported that job openings climbed past 11.2 million — meaning there are roughly two available jobs per worker.
There are other signs that the labor market is starting to weaken, with a plethora of companies, including Alphabet's Google, Walmart, Apple, Meta and Microsoft, announcing hiring freezes or layoffs in recent weeks.
On top of that, data on Wednesday from payroll processing firm ADP signaled that hiring cooled in August, with private companies adding just 132,000 new jobs, the lowest since May.
"Job gains jumped in a surprise beat in July, but as the broader economy slows, job gains are likely to revert to the slower growth we’ve seen earlier in the summer," said Daniel Zhao, a senior economist at Glassdoor.