Expect a strong US jobs report for August, but the devil is in the details

We expect total employment to net increase by 175,000 jobs and the unemployment rate to remain at 4.2% when the U.S. jobs report is released on September 6.

In addition, we expect the average hourly wage to increase by 0.3% compared to the previous month and to weaken slightly from the previous year's figure to an increase of 3.5%.

Key to a recovery in business survey hiring will be demand for workers in private education, health care, and leisure and hospitality.

Hiring in education typically increases in late summer as the school year approaches, and the leisure and hospitality sectors are also expected to see an increase after the slow months of June and July.

With jobs gaining slightly by 114,000 in July and the unemployment rate rising to 4.3%, investors and policymakers will focus on two key aspects of the report.

The first aspect will be whether the seasonal fluctuations that affected the July report fade and the data series returns to the three-month average increase of 170,000 or the slightly stronger pace of the six-month average of 194,000.

We suspect that companies, which have been hoarding workers for the most part over the past two years due to the labor shortage, are in no hurry to hire more employees given the slight slowdown in overall economic demand.

But companies are also in no hurry to lay off employees. We forecast an increase that is consistent with the recent slowdown in hiring over the past three months.

Read more insights from RSM into the economy and SMEs.

Second, we recommend that investors take a close look at the unemployment rate for August. Broken down to three decimal places, the unemployment rate in July was 4.253%, or rounded to 4.3%.

There is a downside risk here, reflecting seasonal fluctuations that have affected household and business surveys. We expect the unemployment rate to decline to 4.2% over the month, based on our forecast of 4.17%.

The conclusion

More importantly, we believe investors and policymakers will be focusing on the size of the likely rate cut at the Federal Reserve's September 18 meeting.

If the jobs report shows hiring below 100,000 and the unemployment rate rising, and initial claims increase while job openings worsen, the Fed may move toward cutting interest rates by 50 basis points.

Unless there is a significant negative surprise in the jobs report and layoffs spike, we believe the Federal Reserve will cut its benchmark interest rate by 25 basis points in September and continue to cut it at each meeting until the rate reaches what we believe is a new neutral level around 3.25%.