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There is a lot riding on the monthly jobs report, which comes out tomorrow. For the economy, more jobs are good: more workers, more wage income, more spending ability, and so forth. There’s no real downside. For financial markets, however, a strong report would be problematic. Those workers—earning and spending their wages—add to demand, which adds to inflation. So, a strong report would be bad news for the Fed, for interest rates, and for markets. This is the problem we face tomorrow.
How Bad Could It Be?
This report is particularly problematic because after a very strong jobs report two months ago and a very strong one last month, fears are rising that this report will signal the start of a significant drop. Other labor market data—the number of open jobs and layoffs in particular—has shown a significant weakening, as did the ADP job creation numbers. The real question, based on the data so far, is not whether this report will be weaker but, instead, just how bad it will be.
That said, expectations are that it will not be that bad. Economists as a group anticipate job growth of around 200,000. This result would be in line with levels before the last two months and would signal continued reasonable growth rates. So far, that number looks within reason and is consistent with the slowdown (but still overall strong numbers) we have seen in other recent data.
Continued Economic Growth Ahead?
If we do get the expected 200,000, or really anything between say 180,000 and 240,000, this would be a return to the prior trend and would signal that job growth continues to be strong enough to keep the economy growing without, hopefully, keeping inflation as high as it has been. There is precedent for this, as we saw a similar spike in July 2022, only to see job growth drop back the following month. That result would be perceived as a positive by the Fed and markets, suggesting that inflation may start moderating again, but is still high enough to allow for continued economic growth.
Based on the data so far, I think that is what will happen. Signs of slowing outnumber signs of strength, making the chance that last month was a fluke likely. At the same time, labor demand remains strong, which suggests a significant drop is also unlikely. A return to the previous trend makes the most sense.
Beyond the jobs number, we will also want to look at other underlying stats. Wage growth, for example, feeds directly into inflation and has been trending down since the middle of last year. Whether that trend continues will be a key data point on Friday. Similarly, the unemployment rate, which remains very low but has stabilized recently, is based on a survey of households and not businesses. It will provide a take on labor supply versus demand, and an uptick would signal more slowing.
The Big Picture
What I expect tomorrow is a slowdown after a couple of months of very strong performance, but a slowdown that leaves us with a growing economy. Job growth should come in around 200,000, wage growth should continue to moderate, and unemployment should tick back up a bit. If that happens, it will be good news, as it will mean the economy continues to grow but slowly. This is exactly what we need to either avoid or minimize the effects of a potential recession later this year.
