September Jobs Report Preview

Tomorrow, the Labor Department releases the jobs report—probably the most important economic report of them all. After all, jobs drive everything. As an indicator of business confidence, job growth is predictive; as the engine of consumer spending, job growth is determinative. We learn a lot about the economy from this report every month.

Good news expected . . .

Economists are predicting that job creation will climb to 175,000 (from August’s not-at-all-bad 151,000), wage growth will pick up again, and hours worked will tick back up. If we get the numbers we anticipate, it will indicate that the economy continues to move forward in a sustainable way.

This has been a bigger concern over the past month. The August business surveys from the Institute for Supply Management were surprisingly bad, to the point that they called the recovery itself into question. The good news is that both of those surveys bounced back more than expected this month; in fact, the more important ISM Non-Manufacturing Index, which reflects the service sector, rebounded with a record increase. Most important for tomorrow, employment also picked up at a record level, which would point to a significant acceleration in job growth.

Other data is saying the same thing. Initial jobless claims (from people getting laid off) were down to 249,000 last week, the lowest level since the mid-1970s. If you consider layoffs as a percentage of the labor force, that's an all-time low. As for people quitting their jobs, we’re back to the levels of the mid-2000s. And the jobs available per unemployed person is at an all-time high.

Not all the news is good, of course. The ADP National Employment Report for September came in below expectations, at 154,000, down from 177,000 the previous month, suggesting a downturn is possible. The flip side of lots of jobs to few workers is that, well, there are fewer workers to hire. We are seeing people move back into the labor force, so that problem is solving itself, but supply constraints are becoming increasingly real as a limiting factor on hiring.

Great news also possible

All in all, from an employment perspective, things are pretty good, and tomorrow's report should ratify that.

Job growth at 175,000, along with recoveries in hours worked and wage growth, would solidify the other recent positive news. In fact, there’s a good chance we’ll get even better results. The positive surprises in the ISM surveys, along with very strong job growth in two of the last three months, suggest that’s quite possible.

But what will markets think?

Any number between 150,000 and 200,000 will likely be treated as good news by markets—evidence of continuing growth, but not strong enough to prompt faster rate increases next year. On the other hand, job growth of more than 200,000 or below 150,000 would call one of the two supports for the market into question.

A weak report, below 150,000, would raise real concerns about growth for the rest of the year, while a strong report could prompt the Fed to be more aggressive with its rate increases. In today’s policy-driven environment, either one could rock markets.