August payrolls seen at 53,000 as Fed weighs rate hike

Wall Street expects the U.S. economy to have added about 53,000 jobs in August, a tepid rebound from July's 23,000 contraction that leaves the Federal Reserve weighing whether a cooling labor market can coexist with inflation still running above 3 percent.

"The one thing [Wall] Street needs to avoid is another negative payroll print or a sharp rise in unemployment that suddenly raises recession concerns," said Jay Woods, chief market strategist at Freedom Capital Markets. "The hope is for modest job creation, stable unemployment, and contained wage growth."

The Bureau of Labor Statistics releases the August nonfarm payrolls report Friday at 8:30 a.m. Eastern. Economists surveyed by Dow Jones Newswires and The Wall Street Journal expect employers to have added 53,000 positions, with the unemployment rate holding at 4.1 percent. The consensus sits just above the 38,000 private-sector jobs ADP reported for August, the slowest pace since January and below the 47,000 economists had forecast.

The report lands 11 days before the Federal Open Market Committee's Sept. 15-16 meeting, where traders have begun pricing a rate increase after the Fed's preferred inflation gauge, the personal consumption expenditures price index, held at 3.7 percent in July. Fed Chair Kevin Warsh told the Jackson Hole symposium last week that labor markets are "quite stable" and that employment gains are "naturally going to run low" in a market consistent with full employment.

A labor-supply wild card

One factor could push the headline below even the subdued consensus. The government canceled Temporary Protected Status for Haitians on July 27, ending work authorization for more than 300,000 TPS holders, according to Bill Adams, chief U.S. economist at Fifth Third Commercial Bank. He forecasts a below-consensus 25,000 drop in payrolls for August, arguing the cancellation may have removed workers from the establishment survey's count.

The effect cuts the other way for the unemployment rate, which Adams expects to hold at 4.1 percent as the labor force contracts. The labor force has shrunk by 1.3 million workers over the 12 months through July as older workers retire and fewer graduates and immigrants take their place, a structural shift that has lowered the number of jobs the economy needs to create each month to keep unemployment steady.

A third straight summer slump

A weak August print would mark the third consecutive year of a summer hiring slump, a seasonal pattern that has weighed on investor sentiment even as layoffs stay minimal. July's job openings edged up to almost 7.3 million in the JOLTS survey, while terminations and new hires were little changed, supporting the "low-fire, low-hire" climate that has kept unemployment historically low.

Not all forecasters see weakness. Economists at Pantheon Macroeconomics attribute July's decline to a seasonal-adjustment quirk in local education payrolls that should reverse, and they expect August to show 125,000 jobs added, more than double the consensus. Uncertainty from tariffs and the Iran conflict, along with high borrowing costs, has kept many businesses from expanding, though there have been few signs of mass layoffs.

The macro backdrop complicates the read. A barrel of U.S. crude trades near $90 on the New York Mercantile Exchange, with the global Brent benchmark close to $95, after the Iran conflict pushed energy prices higher. At the Fed's July 29 meeting, officials cited that uncertainty as a reason for holding rates steady, and Edward Rosenberg, head of ETFs at Strategy Shares, noted the central bank's own playbook argues against raising rates in the middle of an oil price shock.

The stakes for the Fed are direct. A report in line with expectations would signal the job market is stable enough for policymakers to raise rates to fight inflation without stoking unemployment, giving Warsh room to act at the September meeting. A surprise contraction or a jump in the unemployment rate would instead force the central bank to choose between stubborn price pressures and a deteriorating labor market, a dilemma Kyle Rodda, senior financial market analyst at Capital.com, said could emerge after last month's surprise decline in employment.

This article is for informational purposes only and does not constitute investment advice.