The August jobs report is the week's most anticipated economic release as investors closely watch for signs of a rebound in the U.S. labor market following the recession-like figures seen in July.

The Employment Situation report for July revealed a significant slowdown in job creation, with total nonfarm payrolls dropping from 179,000 in June to just 114,000 in July — far below the expected 175,000.

Adding to the concerns, the unemployment rate unexpectedly rose from 4.1% to 4.3%, triggering the Sahm Rule, a well-recognized recession indicator that has successfully signaled every U.S. recession since 1970.

In response to July's weak data, the stock market experienced a sell-off, with the S&P 500, tracked by the SDPR S&P 500 ETF Trust (NYSE:SPY), dropping 1.9% on the day as investors flocked to safe-haven assets, reducing risk exposure amid recession fears.

What can investors expect from the August jobs report?

Sahm Rule: ‘This Time Is Different’

Bank of America forecasts an increase of 200,000 nonfarm payrolls for August, significantly higher than the median analyst expectation of 160,000, as per TradingEconomics.

The private sector is expected to add 170,000 jobs, with government hiring contributing an additional 30,000, according to Shruti Mishra, U.S. economist at the bank. She also anticipates that both the unemployment rate and the labor force participation rate will drop by 0.1%, to 4.2% and 62.6%, respectively.

Mishra highlighted two key aspects of July’s weak job report: “First, the majority of the rise in unemployed workers in July reflected temporary layoffs, likely driven by seasonal factors such as auto retooling volatility in Michigan. Second, the number of workers not at work due to bad weather surged from 59,000 in June to 436,000 in July,” she said.

Texas saw the largest increase in this category, largely due to the impact of Hurricane Beryl.

While the rise in July’s unemployment rate triggered the Sahm Rule — indicating a potential recession — Mishra said she is confident “this time is different.” She highlights that the Sahm Rule only flashed due to temporary, rather than permanent, layoffs.

Bank of America views the low payroll numbers in April and July as statistical anomalies, particularly given that the U.S. economy grew at an average annualized pace of 2.2% in the first half of 2024, the analyst said.

Yet there is also room to be cautious. “We see two potential downside risks to our August payroll forecast,” Mishra added. “The first is the impact of the California wildfires, and the second is that temporary layoffs from July could become permanent.”

Goldman Sachs Disregards July’s Recession Signals

Goldman Sachs has also distanced itself from the July unemployment spike and its potential implications for a recession.

David Mericle, U.S. chief economist at the bank, said the current labor market dynamics do not indicate a recessionary spiral, but rather a normal softening.

“We are clearly not seeing a layoff spiral, the fast-moving vicious circle of job and income loss leading to reduced spending and further layoffs that would be hard for policymakers to counteract,” he said in a report.

Trend job growth is currently running at around 160,000 per month, while job openings remain slightly above pre-pandemic levels, Mericle said.

“It would be odd if labor demand were suddenly weakening excessively because GDP is growing robustly,” he said.

Goldman Sachs also expects that signs of softening in the labor market are sufficient to prompt a gradual easing of interest rates. Mericle said he projects the Federal Reserve will enact consecutive 25-basis-point interest rate cuts in September, November and December, rather than the originally anticipated quarterly cuts.

The Goldman Sachs economist said he does not foresee any 50-basis-point cuts in the near term.

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