August jobs report: "The job market continues to soften"

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Jenny Shen: Welcome to ‘Research Recap’ on J.P. Morgan's Making Sense. I am Jenny Shen from Rate Sales, and today I am joined by Mike Feroli, our chief U.S. economist, to talk about the latest takeaways from the August U.S. employment report, as well as the path ahead for the economy and for the Fed. Mike, welcome back.

Mike Feroli: Thanks. Good to be here.

Jenny Shen: Let's dive right in. What are your key takeaways from today's report? What were the big surprises for you?

Mike Feroli: You know, I don't think we had major surprises. I think the key takeaway was that the job market continues to soften. We were seeing that already in the July report, we've been seeing that really over the course of the last year. And that softening continued into today's report. The number was softer than expected, 22,000. Expectations were around 75,000. In the grand scheme of things, that's not actually a huge miss. And then the unemployment rate did grind higher by a tenth, to 4.3%, almost rounded up to 4.4%. So we are seeing it looks like labor demand probably softening more than labor supply. Beyond that, we didn't see any sharp break in any of the other trends, whether it was hours worked, average hourly earnings, and various details like that. So I think generally what you're seeing is modest continued softening in the labor market like we have been seeing over the past year.

Jenny Shen: Thank you for that. Fed Governor Waller recently argued that the labor market may be on the edge of a sharp decline, and that after accounting for the annual benchmark revision, private sector employment actually shrank in the past three months. What is your estimate for the annual revision? Has today's report confirmed Waller's assessment? How much of this weakness do you think is due to the real economy softening versus the impact from AI?

Mike Feroli: Yeah, so we'll learn more next week when we get the annual, benchmark revision. that's really going to give us a better sense of employment levels in March of this year. Given the information we have at hand, we think we could see downward revisions to the average monthly level of job growth over the past year of about perhaps 50,000 a month, or something in that ballpark. In terms of the softening in the real economy, yes, I think this is more about the economy overall and the pace of the expansion rather than AI. Now we have seen some hints here that AI may be affecting a little bit the composition of job growth. Some of the sectors that people have worried about, professional business services, information. Those sectors did lose jobs last month. But then so did sectors like construction and wholesale trade and manufacturing. Things that we don't think are necessarily as AI exposed. So to us this looks more like a just overall softening in the pace of business activity.

Jenny Shen: Speaking of revisions, today we got a modest one. But there have been large monthly revisions. Does it make sense to take today's print with a grain of salt?

Mike Feroli: I think we should take every print with a grain of salt. I don't think there's evidence that the revisions are getting worse over time. They're not constant. So we did have a big one in July and we had modest ones today. But I think this is always first look, a sample look at an economy of 350-million people. And it's done within a few weeks after the month. So I do think we should always take these with, you know, a few grains of salt.

Jenny Shen: In terms of future prints. When do you expect those government package related resignations from earlier this year to show up in the data, and in what magnitude?

Mike Feroli: So you know I think we're probably seeing that play out already. But we would expect that to pick up some as we go really into the fourth quarter of the year. I think we have been seeing federal employment decline but I think the resignation issue probably gets more pronounced as we go into the fourth quarter of the year.

Jenny Shen: Now turning to the Fed. Is the Fed behind the curve? Curve growth steepened. Market is now pricing slightly more than a 25-basis point cut in September and an aggregate of 70-basis point cut in 2025 versus 55-basis point going in this morning. Market implied Fed terminal rate dropped to 2.75%. Walk us through your expectations for the September meeting and what to expect in the dots? And how quickly do you think the Fed will want to get to neutral?

Mike Feroli: You know I think for September, today's report makes it easy for the Fed to cut. We think they cut 25 in September. You probably will get a dissent or two in favor of 50. Before today's report, we thought perhaps you might also get a dissent in favor of keeping rates on hold. Maybe that looks less likely now. In terms of, you know, how quickly they get to neutral, we have them getting back to neutral by early next year. And one thing I would say is that even though we're starting to see the unemployment rate drift, you know, modestly above their estimate of what is sustainable, in the longer run, we still have an inflation rate that's almost a full percentage point above their targets. So it's not necessarily the case in the current environment. You necessarily want to be at neutral. But we think as, as time goes forward and if we continue to see some deterioration of labor market, you know, moving to neutral, would start to make more sense as we move through the year.

Jenny Shen: Fed independence is very much top of mind right now. Will Lisa Cook be able to vote in the coming meetings? What implications do you see from her case?

Mike Feroli: So I think that's really in the hands of the courts. We expect, or we hope, that the courts come to a decision before the September meeting. I'm sure Chair Powell hopes they do because that takes away, you know, an uncomfortable decision for him. But that is our expectation that the courts resolve this issue. You know, I think the issue with Governor Cook isn't simply about her, but about really any governor and how far for cause removal, could really extend. So yes, if she is removed, that creates an opening for the president to add another person to the board. But I think the bigger significance is that not only would her removal, if confirmed, be a board seat, but I think it could open up, you know, several other board seats because of the precedent that would set.

Jenny Shen: Given that, in your opinion, what is the likelihood that Powell remains on the board as a governor after his chair term ends?

Mike Feroli: Yeah. So certainly he can stay on as governor for several more years. The precedent with one exception, has been once your leadership position expires, you also tend to retire. Chair Powell has not stated his intentions. So I think it's in his head and no one else really knows. So we'll find out.

Jenny Shen: Any expectations for the balance sheet discussion at the coming meeting?

Mike Feroli:  I think right now, given everything we've heard from, committee members, it doesn't feel like any decision, is imminent to change the pace of balance sheet runoff right now.

Jenny Shen: What is our latest expectations on when the end of QT?

Mike Feroli: Yeah, so our expectation is probably toward the end of the first quarter.

Jenny Shen: Looking ahead on the growth outlook. Last week you upgraded Q3 GDP forecast from 1 and a half to 2 and a half percent. This is an acceleration from the 1 and a quarter percent pace that we saw in first half of this year. How does today's report impact your outlook for Q3 and beyond?

Mike Feroli: Yes, I think today's report actually is, raises some really interesting questions about the outlook because, right now private hours worked in the third quarter are contracting at about a 0.5% annual rate. Meanwhile, as you mentioned, we've upgraded our growth outlook for 3Q to 2.5%. I think Atlanta Fed is at 3%. So this is a pretty stark difference in signals. However, while it is unusual, it's not unprecedented. Right now we're just subscribing that to, you know, a pop in productivity in the third quarter, between the two signals, hours worked and GDP, we're probably taking a little more signal from hours worked. I mean right now it is timelier because we do have the August data. I guess we are a little bit cautiously positioned when we're looking ahead to the fourth quarter and still think we have a slowdown from Q3 to Q4.

Jenny Shen: You also noted Q2 corporate profits surprised to the upside. Even with limited tariff pass through so far. What do you think is contributing to this resilience in corporate profits?

Mike Feroli: Yeah, so we know that the tariffs did directly subtract from profits and yet overall profit growth remained firm. And I think that's just a function of unit labor costs remaining tame in the second quarter, which is itself a function of wage growth being softer and productivity being stronger. So basically, in spite of the headwind from tariffs, corporate performance was strong enough to, you know, overpower that and continue to generate positive gains.

Jenny Shen: Before we let you go, is there anything else you're watching closely as we head towards the September meeting or the next wave of economic data?

Mike Feroli: Well, we have CPI next week. You know, there we're expecting it to be again, a little bit on the firm side, which, but not firm enough that we think it takes the Fed off the path of cutting in mid-September.

Jenny Shen: Mike, thank you for joining us today, it’s been incredibly insightful.

Mike Feroli: Thanks.

Jenny Shen: And to our listeners, thank you very much for tuning in to this episode of ‘Research Recap’ on J.P. Morgan's Making Sense.

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