The jobs report for August, released on Friday, will be highly anticipated.

• One of the year's most crucial economic reports is set to be released by Wall Street on Friday.
• The nonfarm payrolls report is expected to reveal a growth of 161,000 jobs in August and a slight decrease in the unemployment rate to 4.2%.
• The Fed is expected to begin lowering interest rates in the near future, with a potential large reduction based on the results of Friday's report.

The Labor Department will release a jobs report on Friday, which is anticipated to significantly influence the future of Federal Reserve policy.

According to Dow Jones, the Wall Street consensus predicts a nonfarm payrolls growth of 161,000 for August and a slight decline in the unemployment rate to 4.2%.

Recent data has shown a sharp slowdown in hiring, which may put downside risk to the forecast.

The Fed is expected to lower interest rates in a couple weeks, with a possibility of a jumbo cut based on Friday's report.

"According to Giacomo Santangelo, economist at Monster, the labor market has cooled faster than expected, which calls into question Friday's report. The focus of the conversation is now on what the Fed will do in response and how they will adjust rates."

Despite a slowdown in job growth throughout 2024, the market was hit hard in July with a report showing payroll growth of only 114,000. This was not the lowest number of the year, but it came after a Fed meeting that raised concerns about the central bank's complacency about a weakening economy and its potential to hold interest rates high for too long.

A series of reports have shown that although the economy is still stable, hiring is slowing down, the manufacturing industry is becoming increasingly contracted, and the Fed must begin to reduce interest rates before it risks exacerbating its inflation battle and causing an economic recession.

On Thursday, ADP announced that August's private job growth was only 99,000, which is the smallest increase since January 2021.

Contemplating the Fed's next move

"If the Fed continues to be too aggressive for too long without easing monetary policy, it could result in a recession, which is something we all want to avoid. If this unfortunate scenario occurs, the Fed will be blamed for the economic downturn."

The Fed is expected to lower benchmark rates by at least a quarter percentage point at its next meeting on Sept. 18, with the possibility of a half-point reduction. The Fed hasn't reduced its benchmark rate by half a point since the emergency cuts during the early Covid days.

Futures contracts indicate that traders are anticipating a sequence of reductions in the fed funds rate, which would result in a decrease of approximately 2.25 percentage points by 2025. The current benchmark overnight borrowing rate is set within a range of 5.25%-5.5%.

The aggressive easing posture suggests a deeper economic pullback, not just an attempt to normalize rates from their 23-year high. In the short term, the move lower is aimed at addressing the labor market's ongoing aftershocks from the Covid pandemic.

Despite the shift to a hybrid environment, the most popular job search terms remain "work from home," "part time," and "remote," while the healthcare industry continues to dominate the job market.

Despite a decrease in the ratio of open jobs to available workers from 2 to 1 to 1.1 to 1, Santangelo stated that there remains a significant skills gap in the labor market.

"Job seekers are looking for more flexibility, while employers are not always providing suitable jobs for those being laid off. The skills gap is still a significant issue, particularly in healthcare."

Worries from job seekers

The labor market is becoming increasingly pessimistic among workers.

Despite the economy performing well, concerns about jobs are increasing, as indicated by the Zeta Economic Index, which utilizes artificial intelligence to monitor economic metrics.

In August, the job market sentiment decreased by 1%, and it has fallen 4.6% from the previous year. The "new mover index" of the gauge dropped 9.9% in August, indicating concerns about job stability.

"Although the economy is strong, job market concerns remain. The dip in job sentiment, combined with the unpredictable consumer behavior, indicates that the workforce is still cautious. According to David Steinberg, co-founder and chairman of Zeta Global, who compiles the index, the persistent job stability concerns continue to dampen broader economic optimism as the economy shows signs of a "soft landing.""

A recent Conference Board survey showed a significant decrease in the difference between respondents who found jobs easily and those who struggled to find them, as reflected in the Zeta data.

The wage component of Friday's report will still be watched by markets, but it has become less of a concern as inflation has decreased.

The agreement is for average hourly wages to rise by 0.3% in the upcoming month and 3.7% year-over-year, which are 0.1 percentage points higher than the previous month.