August Employment Report Preview

Why? Jobs are the best single indicator of what the economy is doing. Consumers get their income from their jobs, so the employment report shows where that sector of the economy may be headed. For business, hiring requires both expanding demand and confidence that expansion will continue, so jobs also serve as a guide for that sector.

Digging a little deeper, jobs drive changes in consumer confidence and willingness to spend and borrow, which in turn can drive the housing market, the money markets, and much of the rest of the economy. Jobs really are the keystone of economic data, and this is why the monthly jobs report is analyzed so heavily.

Expectations for strong growth

The August jobs report is an unusually significant one. With the Federal Reserve potentially poised to raise rates, a strong jobs number could justify a September increase. With signs of weakness largely past, a positive report could ratify the renewed recovery and drive consumer confidence even higher. After two very strong months, expectations are for slower but still strong jobs growth, of around 180,000–190,000.

So far, this looks quite reasonable. The report by ADP, a major payroll processing firm, showed that 177,000 jobs were added last month, in line with expectations and very consistent with what the jobs report is expected to show. Initial jobless claims are still running at a rate of around 260,000–270,000, consistent with strong jobs growth. Business surveys still show companies hiring strongly.

Expectations for strong results seem well grounded. If job growth is in line with expectations, that would be good news.

But what if we get a surprise?

Upside. The argument for an upside surprise is largely based on the past two months, when job growth came in over 250,000 even though the ADP report was in the 170s, as it is right now. If the ADP report missed the jobs then, why not this month as well?

Looking at the details, though, it would be hard to repeat. Business and professional services, for example, added a massive 70,000 jobs last month, which is unlikely to happen two months running, and manufacturing looks to have lost jobs rather than added them. Nevertheless, such a surprise remains possible, in which case the Fed would face more pressure for a September rate increase.

Downside. A somewhat more possible surprise is to the downside. With growth revised down and productivity suffering, companies may focus more on efficiency and investment rather than hiring. Although this will probably show up at some point, there are few signs it is happening now.

A bigger risk is seasonality. One analyst noted that since the financial crisis, the August jobs report has disappointed five of seven times. I don’t really like arguing from history, but this does suggest some form of seasonal misestimate that raises the chances of an apparent substantial decline in job growth. If so, expect talk of a rate hike to be dialed back, as we have seen before.

So what should we expect?

Overall, job growth will most likely come in around the expected level, which would be both healthy and sustainable. This would also be the best outcome for the economy as a whole and for financial markets. Of the two possible surprises, the shortfall is perhaps more likely, but it would largely be due to technical and seasonal factors rather than to a substantial slowdown, limiting the real economic impact. In fact, by reducing the chances of a near-term rate increase, the effect could end up being positive for financial markets.

Conversely, a stronger-than-expected report (of, say, over 220,000 or so) would be positive for economic growth, but by raising pressure for a rate hike, it might end up being negative for markets. In this case, however, the damage from higher rates would be offset by the stronger economic growth such a high level of job growth would create.

The bottom line is that unless we get a seriously weak report, which is not expected, the economic consequences will be largely positive, while the impact on the financial markets will be mixed to positive. The economy as a whole remains in growth mode, with employment in particular doing very well, and tomorrow's report should continue to reflect that.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.

© Commonwealth Financial Network

© Commonwealth Financial Network

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