Fed Case to Cut Rates Again Is Supported by U.S. Jobs Slowdown

(Bloomberg) --

The slowdown in U.S. private sector jobs in August lends support to Federal Reserve doves who want an interest-rate cut this month, but probably doesn’t back the more aggressive half-point move that some investors and policy makers have sought.

Private payrolls rose 96,000 in August, a three-month low. But the data are largely consistent with the central bank’s view of a slowing but still solid economy in the second half of 2019.

“From a Fed perspective, this softens the resistance we have seen from FOMC members to rate cuts,” said Roberto Perli, a partner at Cornerstone Macro LLC and a former Fed economist. “Obviously the job market has slowed this year but payrolls haven’t slowed to an alarming level. I still think it will be a 25-basis-point cut.”

U.S. stocks edged up following the report. Investors have fully priced another quarter-point reduction at the Sept. 17-18 gathering of the Federal Open Market Committee, and those odds didn’t shift much after the employment report was released earlier on Friday. Officials cut rates by a quarter point on July 31 in the first easing in more than a decade.

Investors will hear directly from Jerome Powell at 12:30 p.m. New York time on Friday, when the Fed chairman takes part in a moderated question-and-answer session in Zurich.

Total nonfarm payrolls climbed by a below-forecast 130,000, which was boosted by 25,000 temporary government workers to prepare for the 2020 Census count.

“This supports the easing camp, as we are seeing a marked slowdown in private-sector hiring,” said Sarah House, senior economist with Wells Fargo & Co. “We are seeing a slowdown, though it doesn’t signal we are in deep trouble.”

Employment is particularly important to the U.S. outlook because consumer spending, which accounts for about 70% of the economy, is now providing the main support for the expansion after investment cooled amid weaker global growth and increased trade tensions.

“The argument for no adjustment hangs everything on the U.S. consumer,” said Julia Coronado, the head of MacroPolicy Perspectives LLC. “If we’re seeing signs of slowing in hiring that starts to look cyclical, you can’t be as confident the consumer will carry the baton going forward. I think this report strengthens the case for policy insurance.”

Some Fed officials have been reluctant to support rate cuts while the data looked solid.

Boston Fed President Eric Rosengren said this week the U.S. economy remains “relatively strong” and with continued growth in wages and prices, “no immediate policy action would be required.” Rosengren and Kansas City Fed President Esther George dissented against the July 31 rate cut.

While private payrolls were disappointing, there were positive signs in the report. The jobless rate held at 3.7%, near a half-century low, while average hourly earnings topped forecasts with a 3.2% gain from a year earlier and 0.4% from the prior month.

In addition, two key early indicators of weakness in the U.S. jobs market -- hiring for temporary-help positions and weekly working hours -- strengthened in August. But some sectors were lagging. Manufacturing added an anemic 3,000 jobs, and has been a major area of weakness because of the trade war with China.

--With assistance from Christopher Condon and Alexandra Harris.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Scott Lanman

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