Wolfe Forecasts Stronger US August Payrolls, but Inflation Holds the Key for the Fed

The Wolfe Research call

Days before the U.S. jobs report for August, due Friday, September 4, Wolfe Research expects a stronger-than-consensus print. The firm projects 65,000 nonfarm payrolls added in August, above the 55,000 consensus, with the unemployment rate edging up only slightly to 4.16%. If confirmed, the reading would go some way toward easing the slowdown fears raised by July's negative report.

Breaking down the number

The forecast rests on a solid private-sector base and a softer public component. The private sector is expected to add 75,000 jobs, only partly offset by a 10,000 decline in the public sector. Wage growth is seen rising 0.35% month-on-month, also above consensus. Taken together, the figures point to a labor market still able to generate hiring despite signs of cooling.

Market reaction

Wolfe argues markets may only react meaningfully if the jobs print falls outside the 40,000-100,000 range. Below 40,000, fears of a deeper slowdown would weigh on equities and rates; above 100,000, the picture would turn clearly more positive. The Federal Reserve's September decision, however, will hinge largely on inflation data rather than on the payrolls number alone.

Context: a July surprise

The call follows a July report that unexpectedly printed negative. Nonfarm payrolls fell by 23,000 on a seasonally adjusted basis against a gain of 88,000 expected by analysts, with June revised to +20,000. The unemployment rate eased to 4.1% from 4.2%, but only because the labor force shrank: participation slipped to 61.4% from 61.5%. The decline was led by local government and education, which shed 50,000 jobs, alongside retail (-19,000).

A Fed between a hike and caution

The backdrop is a divided Federal Reserve. On July 29 the FOMC held the federal funds rate at 3.50%-3.75% for a fifth straight meeting on a 9-3 vote, with three hawkish members favoring an immediate hike. Chair Kevin Warsh has signaled he would vote to raise rates if upcoming inflation data do not show cooling. In that setting, the September meeting may see the labor market and prices play different roles: because the Fed looks inflation-sensitive, a payrolls print only slightly above consensus would not, on its own, move the needle.

Sources

• UPI — "U.S. economy lost 23,000 jobs in July; analysts expected gains"
• Marketplace — "The economy lost 23,000 jobs in July. Should the Fed be worried?"
• Tech Times — "Fed Chair Warsh Signals September Hike Readiness as Cook Joins Growing Coalition"