The Jobs Report Lands on Friday. Here’s Why It Matters for Interest Rates.

Friday’s jobs report could determine whether the Federal Reserve finally cuts interest rates.

The monthly release from the Bureau of Labor Statistics is one of the most closely watched economic indicators of the U.S. economy — and this week’s numbers arrive shortly before the Federal Open Market Committee (FOMC) meets Sept. 16-17.

While Fed Chair Jerome Powell’s Jackson Hole speech raised expectations for a September rate cut, he stressed the decision hinges on seeing the latest jobs and inflation data.

There are signs the labor market is weakening. July’s report showed employers added just 73,000 jobs, the weakest gain in years, while revisions erased more than a quarter-million positions from May and June. The unemployment rate rose to 4.2% and the labor force continued to shrink. Together, the figures raised doubts about the labor market’s resilience at a moment when inflation remains stuck above the Fed’s 2% target.

Inflation is also a worry. The core personal consumption expenditures price index, which excludes food and energy and is the Fed’s preferred inflation gauge, showed that core inflation ran at a 2.9% seasonally adjusted annual rate in July. The reading met estimates but is higher than June.

To unpack what’s behind the numbers and what to watch, the Darden Report checked in with economist Bo Sun, an associate professor of business administration in the global economies and markets area at the University of Virginia’s Darden School of Business. Sun spent a decade as an economist at the Federal Reserve Board and will be teaching two new cases, Decoding Fedspeak and Interpreting Fed Communications in Uncertain Times, in the Fall.

Associate Professor of Business Administration, Bo Sun.

Q: The odds on a rate cut are about 85%, reflecting a reading of the employment market. Could a surprisingly strong jobs report change that?

A: A positive surprise on the labor market front could tilt the Fed back towards the wait-and-see stance it’s been taking, facing various uncertainties. The Fed needs to balance between the dual mandate of maintaining price stability and maximum employment.

Q: Why is the jobs report such an important factor in the Fed’s consideration of interest rates?

A: It contains key information on developments on the labor market that is germane to the Fed’s “maximum employment” part of the dual mandate.

Q: How does the Bureau of Labor Statistics collect the data that go into the jobs report?

A: The Employment Situation report  (so-called jobs report) is indeed one of the most significant gauges for cyclical movements (such as a turn towards recession) in the labor market and the broader economy. It contains data from two components: the household survey and the establishment survey.

The household survey is an address-based survey where a household representative is asked to provide information on behalf of the household. The survey generates information on the unemployment rate, among other indicators.

The establishment survey collects data from surveys from businesses and government agencies, asking them about the number of people on their payroll. The establishment survey generates data on payroll gains. In the past, markets have focused more on the private-sector payroll gains, as it is understood as more reflective of labor demand (compared to government payroll). The establishment survey also generates data on “average hourly earnings” for people on the payroll at the organization. It is one of the wage measures used to gauge inflationary pressure and could affect inflation expectations.

Markets have predominantly focused on the unemployment rate and nonfarm payroll gains from the Employment Situation report.

Q: Why do revisions happen, and why can they sometimes matter more than the initial headline number?

Each release is routinely updated twice, followed by a final revision that typically comes out a year later. For example, we will have the August data in the report coming out this Friday. The August data will be revised in October and then again in November. The final revision, referred to as annual benchmark revision, will come out next year to incorporate data from the Quarterly Census of Employment and Wages, or QCEW, that incorporates unemployment insurance claims information.

The first release contains information from a sample of the surveys, with revisions incorporating additional receipts from respondents in the survey. It’s part of the reason that the revisions are a better estimate. In general, the revisions in economic data reflect increased information precision, so revisions can create news.

Q: Beyond payroll growth, what indicators — such as wages or participation — give the best read on labor market health?

The markets seem to have focused primarily on the unemployment rate and payroll changes. Because of the measurement errors inherently embedded in them, a variety of labor market indicators are being taken into consideration in informing monetary policy.

For example, Chair Powell has often discussed the employment-to-population ratio, or EPOP, when addressing situations where the unemployment rate and payroll gains do not send coherent signals.

To see why EPOP can be useful in gauging labor market health, think about the following scenario.  An increase in the unemployment rate can be driven by increases in labor force participation, in which case the rise in unemployment is not necessarily a negative sign about the labor market. EPOP in this case would remain stable, revealing labor market resilience that the unemployment rate alone would obscure.

The establishment data is “job count” (that double-counts when it comes to multiple-job holders) and the household survey is “human count” (including undocumented workers).

Each data has its pros and cons, both in terms of the information content embedded in them and measurement errors in the data collection. It’s important to look at a range of data indicators, including labor force participation, EPOP, wages, work hours, etc.

Q: What’s your assessment of the labor market?

The establishment survey has shown signals of weakening, while the household survey data hasn’t showed as much cooling. This underscores the importance of looking at a variety of data indicators for a holistic picture.