August Jobs Report: Is the Market Ready for a Rate Hike?

Recent stock market volatility and a key Federal Reserve meeting next month have made this Friday’s jobs report one of the most anticipated releases in years. What should we be watching for in Friday’s jobs numbers? Watching Fed Policy During the 2007-2008 financial crisis, one of the most controversial Fed policies dropped the economy’s benchmark interest rate—known as the federal funds rate—to essentially zero. At the time, it was viewed it as a necessary measure to avoid a financial collapse and was intended as a temporary move. Seven years later the Fed’s key interest rate remains near zero. Although the financial crisis is well behind us and the labor market has improved dramatically, Fed policymakers remain cautious due to the economy’s sluggish recovery. Today, inflation hawks at the Fed warn that holding interest rates artificially low limits our ability to use monetary stimulus if we fall into another recession. Conversely, the Fed’s inflation doves argue that raising rates too quickly risks derailing the recovery. Source: U.S. Bureau of Labor Statistics. Weighing the Evidence Policymakers will be watching this Friday’s jobs report closely for any signs of weakness in the labor market. In particular, they’re looking for a return to healthy wage growth—which has been notoriously flat for half of a decade—and continued growth in non-farm payrolls. On the plus side, we’re in an historic period of stability and job creation. July marks 58 consecutive months of job growth, the longest streak since the late 1930s (see the above chart). Today’s 5.3 percent unemployment rate is near what economists call “full employment” and weekly unemployment claims are hovering below 300,000—less than half the rate of the last recession. Combined with scorching 3.7 percent GDP growth during Q2 2015, it’s hard to argue the economy isn’t in terrific overall shape. On the down side, wage growth remains stubbornly flat. Despite a tightening labor market average hourly wages are growing at just 2.1 percent per year, well below the Fed’s target. The large number of sidelined workers has also been a persistent problem during the recovery, and although there has been dramatic improvement in recent months, many policymakers see this remaining slack in the labor market as reason to delay a rate hike as long as possible. Bottom line: With news of weakness in China’s economy, a volatile stock market, and the strongest U.S. dollar in a decade hurting exporters, it’s unlikely that the Fed will begin raising interest rates at its September 17 meeting. Most analysts are expecting the Fed to delay action until December in hopes the tumultuous international economic landscape settles down. According to CME Group, markets are expecting a 28 percent chance of a Fed rate hike in September, and a 56 percent chance at the Fed’s December meeting. The Numbers: Last month the economy created 215,000 new jobs and the unemployment rate held steady at 5.3 percent. This month the Wall Street Journal’s consensus forecast is for 209,000 new jobs. On the heels of a stronger than expected Q2 GDP report, we’re expecting stronger job gains of 220,000 new jobs, a 5.2 percent unemployment rate, and continued slow decline of the labor force participation rate to 62.5 percent. As markets continue to tighten, watch for hourly wage growth to accelerate slowly to 2.2-2.4 percent. To speak with Andrew Chamberlain about the August jobs report or labor market trends, contact pr [at] glassdoor [dot] com. For the latest economics and labor market updates, subscribe to email alerts here and follow @adchamberlain.