Berkadia Reports: As the Labor Market Continues to Cool, a September Rate Cut Grows Imminent

(September 10, 2024)—Bercadia joins others to report a September rate cut is imminent since the labor market continues to cool. Fed officials have been clear that the labor market’s sudden and notable weakening could spur them to cut rates. Economists and investors increasingly think that combined with cooling inflation, the labor market moderation will pave the way for a rate cut this month.

• Nonfarm payrolls miss analyst expectations.
• Historical job market data was revised significantly lower.
• Market prices in at least one rate cut are expected at the September 18th meeting.

The macroeconomic news cycle has recently been dominated by headlines entailing the cooling labor market. The nonfarm payrolls and unemployment, Job Openings and Labor Turnover Survey (JOLTS), and ADP employment prints were all released this week. As inflation approaches the Fed’s 2% goal, market participants are highly attentive to the labor market weakening significantly. In mid-August, the labor market reported that the U.S. economy created 818,000 fewer jobs than initially reported in the 12 months through March 2024. Friday’s nonfarm payrolls print showed that U.S. hiring fell short of forecasts in August. According to the Labor Department, the economy added 142,000 jobs, below analyst expectations of 165,000. The August print was an uptick from the July figure, igniting fears of an overcooling labor market. The unemployment rate in August ticked lower to 4.2%, the first decline in unemployment in five months. The Labor Department also revised its estimates for June and July job growth by 86,000 jobs. Job losses in the manufacturing, retail, and information sectors weighed down hiring. The leisure and hospitality, construction, and healthcare sectors boosted employment growth.

Before the nonfarm payroll and unemployment prints, the JOLTS job openings figure was released on Wednesday. U.S. job openings fell in July to the lowest level since the start of 2021, and layoffs rose, consistent with other signs of slowing worker demand. Available positions decreased to 7.67 million from a downwardly revised 7.91 million reading in the prior month. The figure was lower than all estimates in a Bloomberg survey of economists. The final labor market print released this week was the ADP jobs report. The ADP print dropped to 99,000 from a downwardly revised reading in the previous month. While there was little evidence of outright layoffs in the report, the data did show a sizable reduction in net hiring across the industries.

“The job market’s downward drift brought us to slower-than-normal hiring after two years of outsized growth,” said Nela Richardson, ADP’s chief economist. “The next indicator to watch is wage growth, which is stabilizing after a dramatic post-pandemic slowdown.”

The labor market is in vogue with the Fed and market analysts as inflationary price pressures ease toward the Fed’s 2% goal. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) print, was published last Friday. The print detailed that inflation rose 0.2% in July and 2.5% year over year, in line with analyst expectations. The core PCE also increased 0.2% for the month but was up 2.6% from a year ago. The market expects the Fed to cut rates at the September 18 meeting; however, there is no consensus on the size of the rate cut. According to Bloomberg, there is currently a 35% chance of a 50-basis-point rate cut and a 65% chance that the cut is only 25 basis points. Due to the lack of market clarity on the expected September rate cut size, treasury rate volatility surrounding the announcement should be expected.