US jobs report could bolster or overturn Fed ‘base case’ for quarter-point cuts Reuters

By Howard Schneider

WASHINGTON (Reuters) – In the latest forecasts from U.S. Federal Reserve officials and in recent public comments, the overall economy is seen as remaining in solid shape, but the labor market is seen as weakening and a subject of increasing concern .

Fed Chairman Jerome Powell this week acknowledged the “strain” and said that employment data in the coming months, rather than other economic indicators, “may provide a better real-time picture” of how the which evolves the economy.

First up is Friday’s employment report for September. It may prove key to determining whether the “base case” Powell pointed to for quarter-point rate cuts at the Fed’s other two meetings this year remains intact, or whether the debate tilts toward a cut higher if job growth unexpectedly slows or even pauses. if, for example, wages rise unexpectedly.

In offering a half-point cut in September, Fed officials said their sense of the risks facing the economy had become tilted toward higher unemployment than expected. A dozen Fed officials saw “upside” risks to the labor market, up from just four in the June projections. Only three saw a high risk of rising inflation.

Friday’s payrolls report will be a first look at whether these workplace risks are materializing, paying close attention not only to headline numbers like the unemployment rate and job creation, but also to details like wage growth and the number of long-term unemployed, which has increased in a sign of more difficult conditions for people looking for work.

“RESILIENCE” AT RISK?

In a study last week for Evercore ISI, which looks at economic projections issued by the Fed after its Sept. 17-18 meeting, former top Fed economist John Roberts said interest rate cuts were coupled with expected growth, even if easy, of the unemployment rate. “suggests that the resilience that characterized the US economy as recently as June – with the economy strong despite high interest rates – has largely disappeared.”

The risks were tilted to the downside rather than upside, Roberts wrote, and all things being equal the Fed’s new policy rate of 4.75%-5.00% could put more pressure on the economy than expected.

In an interview with Reuters this week, Atlanta Fed President Raphael Bostic said that if monthly net job growth falls well below 100,000, the approximate rate of return he sees as necessary to accommodate new market entrants labor, he would take it as evidence that the Fed may need to cut rates faster.

Ufuk Akcigit, an economics professor at the University of Chicago who helped develop an employment index using small business data from the software firm intuit (NASDAQ: ), said the trends it sees are worrisome — with job growth declining even as corporate earnings have held up.

Small business jobs fell by nearly 5,000 from August to September, continuing a lower trend that suggests firms have become more anxious. “Given how fragile the environment is, hiring someone is a big decision,” he said. “They behave more risk averse.”

Economists polled by Reuters still expect employers to have added 140,000 jobs last month.

Bostic said he was in no “race” to cut rates, but the central question became “is the economy still producing net jobs? … What is the aggregate number and what does it look like?”

He said that while the “steady state” rate of job growth is difficult to estimate given the uncertainty surrounding issues such as immigration, numbers below 100,000 would raise “another level of questions to understand in to what extent is this an abnormal reading … indicative of something more fundamental?”

Bostic said he will also track how many industries are adding jobs “to see, is it broad or is it isolated to a certain sector or not?”

UNEMPLOYMENT AT EQUILIBRIUM?

By many measures, the current US unemployment rate of 4.2% is quite good, and is especially considered so by Fed policymakers in the context of how quickly and far inflation has fallen as price pressures fall dramatically they are usually associated with slow or straight growth. recessions and high levels of unemployment.

August’s unemployment rate was well below the average unemployment rate of 5.7% seen since the late 1940s. Importantly for the Fed, it is now right at the level that the median policymaker considers consistent with an inflation rate of 2 % targeted by the Fed over the long term.

But unemployment has risen steadily for more than a year — enough to trigger some reliable recession indicators. According to the Fed’s own projections, it will rise at least a little more.

The historical record is not good in this regard. Once increases in the unemployment rate reached more than half a percentage point over the course of a year, the trend was for higher increases to follow. That’s something decision makers will keep in mind when examining the latest headline numbers.

“Unemployment levels are good, but the trend line is not good at all,” Richmond Fed President Thomas Barkin said. It’s an open question whether it’s settling at the “right level” near what’s considered sustainable month-to-month, or whether it’s about to cross that level upwards.

Investors by a nearly two-to-one margin currently expect the Fed to cut its key rate by another quarter point at its Nov. 6-7 meeting, an outlook that Friday’s data could either confirm or deny. begins to remodel.

“Each meeting, we’ll get one or two jobs reports. We will get one or two more inflation reports. in a different way, you have the ability to react appropriately,” Barkin said.