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next week the market will usher in the august non-farm data, which will be the last major employment data before the federal reserve’s september decision, and may be the key to deciding whether to cut interest rates by 25 or 50 basis points.

with inflation slowing, fed chairman jerome powell has signaled that he will start cutting interest rates in september and said officials "neither seek nor welcome" a further cooling of the labor market. nonfarm payrolls grew less than expected in july and the unemployment rate hit its highest level in nearly three years.

next friday, the u.s. department of labor will release non-farm data for august. the market generally expects that the number of new jobs will be 165,000, a significant increase from 114,000 last month. the average employment growth in the past three months will slow to slightly above 150,000, the smallest increase since early 2021, and the unemployment rate may drop slightly from 4.3% to 4.2%.

citigroup is more pessimistic than the general expectation, and it expects that 125,000 jobs will be added in august, and the unemployment rate will remain at 4.3%, which is roughly similar to july. this will confirm that the weaker data in july is not just due to temporary factors, but reflects the real weakening of labor demand, which may lead to the federal reserve to cut interest rates by 50 basis points in september.

regarding the optimistic outlook for august, bloomberg economist anna wong believes:

nonfarm payrolls are likely to improve from disappointing july data, but an early revision of 818,000 in the bureau of labor statistics’ base period for march 2024 may make fed officials less willing to put their faith in the initial reading.

citigroup expects non-farm payrolls to remain weak in august, which may lead to a 50 basis point rate cut by the federal reserve in september

citigroup expects payrolls to rise by 125,000, almost as weak as in july:

we see downside risks to employment in the construction, government, manufacturing, and leisure/hospitality sectors. total residential construction has been falling throughout the year, bucking the trend of still-rising construction employment, and we do not think this divergence will last long. construction spending on nonresidential projects has also stagnated in recent months, and the direct spending stimulus from fiscal policy initiatives over the past few years has peaked. we expect this to lead to weaker government employment in the coming months.

we also expect a notable decline of 15,000 in manufacturing employment, partly reflecting the typical decline in auto manufacturing payroll jobs in july during the summer holiday season, which may not fully rebound in august. with demand for autos weakening, production levels are likely to be lower.

finally, spending on more discretionary services, such as restaurants, has been subdued for much of this year, which could lead to further employment weakness in the leisure/hospitality sector.

secondly, in terms of unemployment rate, citi believes that the unemployment rate may lead to the risk that the federal reserve will be more dovish:

if the unemployment rate rises again to 4.4% or higher, even with strong job creation, we think a 50 basis point fed rate cut is all but certain, especially given the recent large downward revisions to job creation.

the unemployment rate has continued to rise every month since march, in a way that typically precedes a recession. we expect the unemployment rate to remain unchanged at 4.3% in august, and while it is not hard to see it falling back to 4.2%, further increases in the unemployment rate remain an underappreciated risk amid a more rapid weakening of the labor market.

even if the unemployment rate falls slightly, one month of data may not be enough to convince fed officials. but if the unemployment rate falls back to 4.2% or 4.1%, new jobs may be more important. if job growth in august is less than 125,000, a larger rate cut would be more likely.

in addition, citi emphasized that since the august employment data will be released the day before the quiet period of the federal reserve’s september fomc meeting, the august data will largely determine whether the interest rate cut will be 50 basis points or 25 basis points.