The Upcoming US July Nonfarm Payrolls May Hint at the Feasibility of More Rate Cuts After September

July's nonfarm payrolls report will be released at 8:30 a.m. ET this Friday. The median forecast of analysts for the upcoming nonfarm employment is 178K, down from 206K in June. The unemployment rate is expected to remain at 4.1%. Before the release of July nonfarm payrolls, numerous indicators have already pointed to further normalization of the job market.

■ The Fed's favorite quarterly wage growth indicator slowed in the 2nd quarter

Employment Cost Index released on Wednesday showed that the increase in compensation costs for civilian workers moderated to 0.9% in the second quarter of 2024, coming down from a peak growth rate of 1.2% in the prior quarter and falling just short of market projections of a 1% rise. This deceleration was observed in both wages and salaries, which grew at a rate of 0.9% compared to 1.1% in the first quarter, and benefits, which saw a more modest easing to 1% from the previous quarter's 1.1%.

■ Job opening data shows hiring is losing momentum.

On Tuesday, the US Bureau of Labor Statistics (BLS) released data from the Job Openings and Labor Turnover Survey (JOLTS), indicating that there were 8.184 million job openings available. This figure comes after the revised May report that counted 8.23 million job openings, initially reported as 8.14 million, and exceeded market forecasts of 8.03 million.

Job openings saw a decline in sectors such as durable goods manufacturing, which dropped by 88,000, and the federal government, where openings decreased by 62,000. The current figure of 8.184 million job openings is a decrease from the 9.12 million reported the previous year. Additionally, there was a notable decrease in the number of voluntary resignations, or job quits, which fell to 3.282 million—the lowest since November 2020—from a downwardly revised figure of 3.403 million in May. This trend suggests that employees may be feeling less confident about the labor market and could be less inclined to leave their current jobs in search of new opportunities.

■ ADP Employment fell below expectation

The latest ADP report indicates that US private sector employment growth has slowed again, with the addition of 122,000 jobs in July 2024, marking the smallest increase in the past six months. This figure comes after June's numbers were revised upward to 155,000, and was below the anticipated 150,000.

Within the service sector, there was a gain of 85,000 jobs, but there were job reductions in professional and business services, losing 37,000 positions, and the information sector, which saw a decrease of 18,000 jobs. Manufacturing also experienced a slight decline, shedding 4,000 jobs. Additionally, the report highlights that annual wage growth for employees who remained in their positions has slowed down to 4.8%, the lowest rate in three years.

■ The number of people applying for unemployment benefits rose in June

The number of people claiming unemployment benefits in the US was 235,000 in the period ending July 20th, remaining significantly above this year’s average. The four-week moving average for initial claims, which reduces week-to-week volatility, rose by 250 to 235,500.

Continuing jobless claims in the United States reached 1,851,000 during the same period. This level has already normalized to pre-pandemic levels.

■ What's the implication for the Fed?

The Federal Reserve is keeping a close eye on the labor market and staying vigilant for signs of a potentially sharp downturn, Fed Chair Powell said at his press conference after FOMC meeting on Wednesday. He also noted that low unemployment and a low level of layoffs suggest a “normalizing labor market,” and said“a reduction in our policy rate could be on the table for as soon as the next meeting in September.”

Since CME FedWatch shows that the market has fully priced in a rate cut in September, the more important question is whether there will be further rate cuts at the November and December interest rate meetings. Currently, the probability of cutting interest rates twice by November stands at 73.3%. If the non-farm payroll figures released on Friday are consistent with the weakening trend shown by other labor market indicators, it may further reinforce expectations that there could be more than one rate cut this year.

Source: ADP, BEA, Trading Economics