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Friday’s Jobs Report Is Likely to Affirm Slowing Recovery. Here’s What to Watch.

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Rehiring is likely to have continued in August, though at the slowest pace since the job market began to spring back from mass layoffs in March and April.

High-frequency labor market gauges over the past month suggest that while the economic recovery is ongoing, it is losing some momentum. Job postings, employment across small businesses, and temporary employment all slowed between the July and August payroll reference periods (the Labor Department surveys during the week of the month that contains the 12th). On the other side of the jobs equation, meanwhile, layoffs remain at historic levels. job posting

Given the volatile nature of the U.S. economy’s snapback from March and April levels, it’s been harder than ever for economists to forecast monthly economic readings. That’s especially true for nonfarm payrolls, where issues such as misclassifications of laid-off workers have made the data less predictable.

In other words, “Friday’s data are anyone’s guess, which has been the case with the monthly payroll data since the crisis began,” says Josh Shapiro, chief U.S. economist at MFR.

Even so, there are several clues and special factors for investors to consider heading into Friday’s employment situation report for August. Here’s a rundown of what to watch.

Slowing Payroll Growth

The range of estimates for August hiring is wide. Lydia Boussour of Oxford Economics expects an increase of 1.4 million, for example, while Diane Swonk of Grant Thornton is looking for a rise of 800,000. While estimates are in a relatively wide range, one thing is certain: economists broadly agree that payroll growth slowed markedly in August as infection rates continued to rise and the initial spike in reopening activity faded.

“The August jobs report should confirm that the labor market has settled into a frustratingly slower pace given the 13 million jobs shortfall relative to February,” Boussour says, meaning she expects one out of two laid-off workers to still be unemployed. An increase of 1.4 million (that is also the average estimate among economists polled by FactSet) would leave the level of employment more than 8% below its prerecession level and the economy still short of 11 million jobs compared to February, Boussour says.

Government Hiring

The 2020 Census alone probably added about 295,000 temporary hires to August payrolls, Swonk says. The effect is later than in normal census years, thanks to the pandemic, and Boussour notes that the Census Bureau recently reported 288,000 workers received pay during the August payroll survey week, compared to 50,000 during the July survey week.

Those census workers, however, are slated to be let go by the end of September. At the same time, some economists expect some education-related rehiring to boost August payrolls. Veronica Clark at Citi expects an increase of about 400,000 in government jobs, with some of that reflecting hiring as some school districts across the country at least partially reopen. That’s after education employment fell far below usual summer-break levels, Clark says.

Not everyone agrees, though. Swonk says the move to hybrid and online schooling will exacerbate the pullback in the usual hiring of administrative and support staff for the month, with those losses likely to be even worse in September. More broadly, Boussour says state and local budget squeezes mean governments were probably forced to cut their workforce to balance budgets, something that may show up in the August report, and Swonk warns that a glitch in July data (she says a seasonal adjustment artificially boosted government payrolls by nearly 250,000 jobs in July) could be entirely reversed in August.

Unemployment Rate Retreat

Economists polled by FactSet predict a decline in the U-3 unemployment rate to 9.8%, down from 10.2% in July. Boussour sees a slightly bigger fall to 9.7%. That would mark the first sub-10% reading since April. While the continued downtrend is encouraging, Boussour says, it would still represent the second month of slowing progress.

Investors should keep in mind that a classification issue remains a factor, with workers still incorrectly classified as “employed but absent from work” meaning the U-3 rate continues to look lower than it actually is.

Paltry Participation

The labor-force participation rate fell substantially in March and April and then fell again in July after a modest improvement in May and June. Boussour expects to see a small 0.1 percentage point improvement in August to 61.5%, still close to its lowest level since the late-1970s. Swonk instead predicts another decline, to 61.3%, as some working parents step out of the workforce to care for children who aren’t returning to school in person this fall.

Any further deterioration in labor force participation would undermine progress in the way of a falling unemployment rate because declining participation effectively gives an artificial bump to the U-3 rate.

PPP Problems

A study by Cornell University in early August showed that a second wave of coronavirus layoffs has been under way as Paycheck Protection Program funds ran out. Of workers who were placed back on payrolls after being initially laid off or furloughed because of the pandemic, 31% report that they have been laid off a second time, the study shows. An additional 26% of those placed back on payrolls said they were told by their employer that they may be laid off again.

That impact may show up in the August report, though Swonk says the worst of the layoffs tied to the end of PPP loans appear to have occurred after the survey week for August employment. That potentially sets up for additional weakness in September, she says.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com