The US Labor Department is set to release the August non-farm payroll report at 8:30 PM Beijing time on Friday. Following July's unexpected decline of 23,000 jobs, economists broadly anticipate a modest rebound in hiring activity, though the overall growth is expected to remain constrained. The prevailing characteristic of the US labor market continues to be a state of "low hiring and low layoffs."

According to the median market forecast, August non-farm payrolls are expected to increase by 56,000, with the unemployment rate likely holding steady at 4.1%. Average hourly earnings are projected to rise 0.3% month-over-month, recovering from July's 0.1% gain, while the year-over-year figure is expected to edge down to 3%. This report represents the most critical employment data ahead of the Federal Reserve's September policy meeting, where markets currently see a high probability of the first interest rate hike in over three years. Unless the employment figures show a clear deterioration, a mildly soft report is unlikely to shift market expectations for policy.

Employment Growth Slows, Yet Unemployment Remains Low

July's non-farm payrolls decreased by 23,000, and the data for May and June were revised downward, with a combined total of 103,000 fewer jobs than previously reported. The consecutive monthly figures indicate a noticeable cooling in US hiring activity. However, the unemployment rate has not risen in tandem, as over 250,000 people exited the labor force in July, bringing the rate down from 4.2% to 4.1%. Over the trailing twelve months through July, the US labor force has contracted by approximately 1.3 million people.

Adam Schickling, a senior economist at Vanguard, notes that the US job market has moved from a phase of "low hiring, low layoffs" to something closer to "almost no hiring and almost no layoffs." He suggests that while this environment is particularly challenging for new entrants and the unemployed, the overall labor market remains relatively stable based on corporate layoff trends. Schickling therefore believes that the job market, while soft, has not yet shown a clear stall. David Payne, an economist at Kiplinger, also points out that the "new normal" for future US employment reports may be monthly job gains below 100,000, rather than the robust six-figure increases seen in the past.

Weak ADP Data Widens Divergence on Wall Street Forecasts

The ADP private payroll report released Wednesday reinforced a cautious market sentiment. US private sector employment increased by only 38,000 in August, down from 46,000 in July and below economists' forecast of 47,000. By sector, education, healthcare, leisure and hospitality, and construction saw job growth, while manufacturing posted the most significant decline. Although ADP data does not perfectly correspond with the official non-farm payroll figures, this result increases the risk of a downside surprise in Friday's data.

Wall Street forecasts for August non-farm payrolls show a notable divergence. Wells Fargo projects an increase of 80,000 jobs, arguing that the unusual declines in leisure and hospitality and state and local government education jobs in July exaggerated the cooling of the labor market and that a partial rebound is likely in August. BofA Securities forecasts an increase of 40,000 jobs, pointing to a consistent pattern of summer seasonal weakness in US employment data, with August typically more prone to missing expectations. Bill Adams, chief US economist at Comerica Bank, expects August non-farm payrolls to decrease by approximately 25,000 again. He attributes this primarily to labor supply contraction rather than a sudden collapse in business demand. Adams specifically notes that the US government's cancellation of temporary protected status for over 300,000 Haitian immigrants on July 27, along with their work permits, could affect labor-intensive sectors such as healthcare and social assistance. The weak ADP data further reinforces his pessimistic outlook.

Schickling forecasts an increase of about 20,000 jobs in August, but sees the unemployment rate potentially rising to 4.3%. He believes the recent decline in labor force size is related to a weaker participation rate among the 25- to 34-year-old demographic. If this population segment re-enters the job market, the unemployment rate could temporarily rise. The BlackRock Investment Institute points out that a slowdown in labor supply growth means a decline in job creation does not necessarily represent a simultaneous deterioration in demand. If labor supply continues to shrink, while AI-related investment supports economic activity, wage and inflation pressures may remain resilient.

Fed's Focus on Inflation Means Jobs Data Needs a Clear Deterioration to Shift Expectations

Fed Chair Kevin Warsh stated at the Jackson Hole annual symposium last Friday: "The labor market is fairly stable." He noted that the 4.1% unemployment rate "remains very low by historical standards." Warsh added that in a labor market near full employment, job growth "naturally remains at a slower pace." In other words, monthly job gains of only tens of thousands do not necessarily signal a significant economic downturn.

Compared to employment, the Fed is currently placing greater emphasis on inflation. Warsh indicated that while the labor market is consistent with full employment, the data on price stability, a part of the Fed's mandate, is more concerning. The previously released PCE inflation index showed US prices rose 3.7% year-over-year in July, notably higher than the Fed's 2% target. Following Warsh's hawkish remarks, the CME FedWatch tool shows a 37.7% probability of the Fed holding rates steady in September and a 62.3% probability of a 25-basis-point rate hike.

BofA Securities believes the August non-farm payroll report alone is unlikely to be decisive for September's rate decision. Unless the report is clearly weaker than expected, inflation data will remain the core basis for Fed policy. What could genuinely alter market pricing is a more definitive sign of labor market deterioration. Schickling suggests that if August marks the second consecutive month of negative job growth, or if the unemployment rate rises to 4.3%, the market could significantly reduce the probability of a September rate hike. Average hourly earnings coming in below expectations would also reinforce this view.