Jobs report will help Federal Reserve decide how much to cut interest rates

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WASHINGTON (AP) — Friday’s monthly jobs report is likely to be a pivotal moment for the economy and the Federal Reserve.

If the data shows weak hiring in August and a higher unemployment rate — similar to the unexpectedly weak numbers in July — that would heighten concerns about a faltering labor market. The Fed could then seek to deliver a stimulus package by cutting interest rates by a half-percentage point more than usual when it meets later this month.

On the other hand, if hiring picks up from July’s gain of just 114,000 jobs, or if the unemployment rate falls from 4.3%—a three-year high, but still low by historical standards—it would suggest that the labor market is still stable, albeit slowing. The Fed could cut its key interest rate from its 23-year high by a more modest quarter-point, with further rate cuts in the coming months.

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Either outcome could also help shape the remaining two months of the presidential race. Another sluggish jobs report could fuel former President Donald Trump’s claims that the Biden-Harris administration oversaw the economy’s decline.

But a more sober report would provide Vice President Kamala Harris with evidence that the labor market is still moving forward even as inflation has fallen from a four-decade high to near the Fed’s 2% target, opening the door to lower interest rates. Cuts to the Fed’s benchmark interest rate would eventually lower borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.

The two presidential candidates have outlined opposing economic plans in their speeches this week, with Trump promising to cut the corporate tax rate to 15% and eliminate taxes on tips and Social Security income. Harris has pledged to expand tax deductions for startups while raising the corporate tax rate to 28%.

Economists estimate that the government will report on Friday that employers added 160,000 jobs in August and that the unemployment rate fell to 4.2 percent. Since hitting a half-century low of 3.4 percent in April of last year, the unemployment rate has risen by about a full percentage point.

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But most of the rise in unemployment reflects an influx of people into the labor force—particularly recent immigrants but also recent college graduates—who did not immediately find work and were thus counted as unemployed. That makes the increase in unemployment less worrisome than if it were caused by waves of job cuts. In fact, the pace of layoffs is barely higher than it was before the pandemic.

Yet slowing hiring is often a precursor to layoffs—one reason why Federal Reserve policymakers are now focusing more on supporting labor-market health than on continuing to combat inflation.

Recent economic data has been mixed, adding to the importance of the jobs report, which is among the most comprehensive economic data the government releases. The Labor Department surveys about 119,000 businesses and government agencies and 60,000 households each month to compile employment data.

On the downside, firms are advertising fewer job openings, and fewer workers are quitting to look for new opportunities. In a healthy labor market, workers are more likely to quit, usually for new, higher-paying jobs. As fewer people quit, that means there are fewer jobs available for the unemployed.

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“New graduates and returning workers are having a hard time adjusting to the job market,” says Daniel Chow, chief economist at Glassdoor. “For these people, it’s definitely worse because they can’t get their foot in the door.”

The Federal Reserve’s Beige Book, a collection of anecdotes from its 12 regional banks, suggests that many employers are becoming more selective about who they hire in July and August. And a survey by the Conference Board in August found that the share of Americans who think finding jobs is hard is rising, a trend that has often been linked to rising unemployment.

Meanwhile, consumer spending, the main driver of U.S. economic growth, rose at a healthy pace in July. The economy grew at a robust 3% annual rate in the April-June quarter.

Federal Reserve Chairman Jerome Powell has made clear that he doesn’t want to see the labor market weaken further, which is why a particularly weak jobs report could prompt the Fed to announce a major interest rate cut this month.

Later Friday, Christopher Waller, a member of the Federal Reserve’s Board of Governors, is scheduled to discuss the economic outlook in a speech at the University of Notre Dame. Waller, an influential member of the Board of Governors, could offer insights into the Fed’s next steps.

Some labor market experts say the Fed’s aggressive interest rate cuts could spur some companies to start hiring faster.

“Everyone is waiting,” said Becky Frankiewicz, president of North America at the giant Manpower company. “Everyone is waiting for the meeting in mid-September to release some staff and start spending.”

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