Friday's jobs report will likely determine the size of the Fed's rate cut

The Federal Reserve is expected to shift gears this month on monetary policy and enact the first rate cut since the central bank started its inflation-fighting tightening cycle 30 months ago.

Although key inflation readings, including the closely watched Consumer Price Index, are due out a week before that crucial decision, the size of the rate cut likely will be determined this Friday.

The US economy is at an inflection point, and Friday's jobs report, which the Bureau of Labor Statistics is set to release at 8:30 am ET, could very well telegraph the direction of the economy.

"The next set of job numbers released this week will be among the most consequential in a while," Tuan Nguyen, US economist at RSM US, wrote in commentary issued Wednesday.

The August jobs report is expected to provide clarity as to whether the labor market is slowing gracefully or spiraling quickly. A few weeks ago, the July jobs report signaled the latter, when the economy added just 114,000 positions and the unemployment rate shot to 4.3% from 4.1%.

The numbers sent a violent reaction through the stock market as fears escalated that the once strong labor market - and the economy - were buckling under the crushing weight of high interest rates.

Economists have struck a more tempered tone, noting that labor force participation remains steady and that the pullback in hiring was not accompanied by a sharp increase in layoffs. Separate unemployment indicators have agreed, showing that jobless claims - and, by proxy, layoffs - remain muted.

Friday's jobs report should provide further reassurance that the labor market is merely softening and not collapsing, economists predict. According to FactSet consensus estimates, economists are forecasting that US employers added 160,000 jobs in August and for the unemployment rate to tick down to 4.2%.

"The labor market has downshifted into a low gear, but there's nothing that stands out as being a flashing red signal," Karin Kimbrough, chief economist at LinkedIn, told CNN in an interview. "It would be a mistake to define the labor market as being excessively weak at this stage."

Instead, the signals indicate that the labor market has moved from being extremely strong and into better balance, she said.

"The question is whether it moves beyond that balance point into something that is very weak," she said. "I don't think we have signs yet that we're in that stage where it's very weak."

Reducing hiring 'can only go so far'

In the aftershocks of the July jobs report, a fairly humdrum weekly economic report - the Labor Department's read on unemployment insurance claims - became must-see-TV.

However, the weekly claims numbers have been fairly ho-hum.

"Companies are managing their costs and managing their headcounts by reducing hiring," Oliver Allen, senior US economist at Pantheon Macroeconomics, told CNN.

US businesses are hiring at some of the lowest rates (outside of the pandemic) since 2014, according to the recent months' Job Openings and Labor Turnover Survey reports from the BLS.

"That can only go so far; you can only cut your gross hiring to zero," Allen said. "At some point, if pressures start to mount, then you have to start considering layoffs."

Fresh data released Thursday, however, suggests that some companies - and the tech industry in particular - were indeed moving forward with layoffs.

US-based employers announced 75,891 job cuts in August, according to a monthly report released Thursday by outplacement and research firm Challenger, Gray & Christmas. That's a sharp upswing from July's 12-month low of 25,885.

However, when compared to August 2023, last month's announcements were only 1% higher, Challenger noted.

"August's surge in job cuts reflects growing economic uncertainty and shifting market dynamics," said Andrew Challenger, senior vice president at Challenger, Gray & Christmas. "Companies are facing a variety of pressures, from rising operational costs to concerns about a potential economic slowdown, leading them to make tough decisions about workforce management."

Technology firms accounted for more than half of the announced job cuts. Of those 39,563 tech cuts, 5,943 were attributed to artificial intelligence, according to the Challenger report.

Some key indicators to watch

Although the labor market may not be on the verge of an imminent collapse, it likely cannot withstand any more months of 23-year-high interest rates, Nick Bunker, economic research director for North America at the Indeed Hiring Lab, wrote in a blog post on Wednesday.

"The labor market is no longer cooling down to its pre-pandemic temperature... it's dropped below it," he wrote. "The labor market is past moderation and trending toward deterioration. The Federal Reserve has indicated that it has shifted some attention away from inflation and toward the health of the labor market, which is good, but it needs to take action soon."

But even if rates start moving downward as soon as this month, it not only may take some time before the labor market feels it but also there's still plenty of lagging monetary policy that still needs to be worked off, Pantheon's Allen said.

"As much as the Fed might not want to see more deterioration, the simple fact is they have already raised rates a very long way, left rates at a high level for quite a while, and monetary policy obviously operates at a lag," he said. "So, I think some further deterioration is already in the pipeline."

Beyond the topline payroll and unemployment numbers, there are several other metrics within Friday's jobs report that could show the direction of travel, economists note.

Hours worked: The length of the average workweek is viewed as an economic bellwether. If businesses experience a drop-off in demand, they'll typically cut hours before making more drastic moves. The average workweek fell slightly in July to 34.2 hours from 34.3 hours.

Labor force movement: The number of people re-entering the labor force to look for work shows underlying sentiment about the strength of the jobs market; however, it does bump the unemployment rate higher.

Temporary layoffs: Part of the rise in July unemployment reflected a spike in temporary layoffs that was the third largest since 2000 (excluding Covid), wrote Bank of America economists in an investor note Wednesday. The economists cautioned that these "could turn permanent. However, they said they expect this trend to have been reversed in the August report, noting the increase was likely driven by the "summer auto retooling-related volatility in Michigan."

Weather effects: In the July jobs report, the BLS noted that Hurricane Beryl "had no discernible effect" on the national employment and unemployment data. However, the weekly jobless claims data has shown some increases in unemployment, particularly in Texas, Mike Skordeles, head of US economics at Truist, told CNN. "We know that there were distortions there," he said.

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