Will US August NFP Show Slowing of Recovery?

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After the latest from the Fed’s policy outlook, there is a renewed focus on employment figures from the US.

Expectations are for jobs to be the guiding light of monetary policy, and therefore the dollar, for at least the next year.

Stock markets also largely depend on cash injections from the Fed.

Given the difficulties in compiling data because of COVID, we might have increased volatility in the markets in reaction to NFP.

What We Are Expecting

Expectations are for headline NFP to slow their pace of growth to 1.4M net new jobs created during August. This is in comparison to 1.76m in the prior month.

From the pandemic, 21.2M jobs were lost. And, since then, a net of around 9.0m has been created.

That means in the three months of “recovery”, only about 42.5% of jobs have come back. If expectations are met, then we still won’t reach 50% of job recovery.

Expectations are for the unemployment rate to drop down to 9.8% from 10.2% prior. A far cry from sub-structural unemployment in February, but below the psychologically important double digits.

However, there are some important caveats.

What to Keep in Mind When Analyzing the Market Reaction

The consensus of expectations is that the labor force participation rate will stay the same as last month at 61.4%.

Participation has been on the decline over the last couple of months, as people took advantage of generous unemployment benefits and stayed away from potentially being infected with COVID.

However, many of those unemployment benefits lapsed at the end of July, with a partial extension by Executive Order. This means that many people might have chosen to return to the labor market in August.

That has two implications: either they found jobs, and this would push up the NFP number. Or they didn’t, and that will push up the unemployment number.

Or even both! If a lot of people come back to the market and find jobs, it doesn’t mean a larger percentage didn’t also come back and didn’t find jobs. This could explain an eventual discrepancy of a high jobs number, but not a significant drop in unemployment.

The Implications of the Trends

Over the last four weeks, the average number of people seeking unemployment benefits has started to diminish. It has been flat through most of June and July.

The trend is generally understood to represent an improvement in the labor market. With the number of COVID cases falling off and states like Texas allowing businesses to reopen, it might mean we could get a surprise upside in the NFP numbers.

Average hourly earnings are expected to increase, but not so much as last month, showing a growth of 4.5% compared to 4.8% in July.

The implication here is that more lower-income jobs are being filled, a sign of a return in labor market growth. Monthly job openings have continued to increase since April.

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