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Another big U.S. jobs report could trigger Wall Street tremors – but beware the dreaded ‘August effect’

The U.S. jobs report for August could be the most important in years, the thinking goes on Wall Street. Another big gain could push the Federal Reserve to unwind its easy-money strategy and even cause an earthquake in stock and bond markets.

Just don’t take it to the bank. August is one of the trickiest months for the government to determine how jobs were created because so many people are on vacation. And the coronavirus pandemic has only made the problem worse.

Let’s start at the beginning.

The U.S. likely added 720,000 new jobs in August, following increases of 943,000 and 938,000 in the previous two months. So say economists surveyed by The Wall Street Journal.

Read: U.S. jobless claims fall to new pandemic low of 340,000 despite delta surge

A gain of that size would probably be enough to persuade the Fed that the economy is almost ready to stand on its own. For the past year and a half the central bank has been engaged in a grand scheme of reinforcing a fragile economy by keeping interest rates at record lows.

The Fed has accomplished its goal by keeping a key short-term interest rate near zero and by buying $120 billion a month in Treasury bonds and mortgage-backed securities.

Read: Consumer confidence sinks to 6-month low on delta anxiety and inflation

Also: Inflation in the U.S. is running at the highest level in 30 years

These purchases have reduced mortgage rates to record lows, pushed more investors into equities and help drive the stock market
DJIA,
+0.20%

SPX,
+0.09%

to an all-time peak.

Fed officials have already said they plan to reduce, or “taper,” these bond purchases before the end of the year. A big increase in hiring in August, by say 1 million or so, could spur the Fed to announce its plans to taper as soon as this month.

A smaller increase in line with Wall Street’s forecast, meanwhile, would probably keep the Fed on track for a taper announcement in October or November.

Here’s where it gets tricky. What if hiring is disappointing —perhaps 500,000 new jobs or less? Could it push tapering off to next year?

Probably not. Why ? The Fed and investors might blame a jobs shortfall on the dreaded “August effect.”

Each year tens of millions of Americans go on vacation in August, including many small-business owners and corporate executives. So far fewer businesses than usual reply on time to the government’s questionnaire about how many people they hired during the month.

As a result, the first of three Labor Department estimates of job creation in August tends to be on the lower side and undershoot Wall Street’s forecast. Later revisions often show a bigger increase in hiring.

The pandemic has added another wrinkle.

The virus has upset the normal seasonal ups and downs in educational employment between the spring and fall. Without getting into the weeds, the effect is that the jobs report could show an unusually large increase in school hiring last month and partly offset the so-called August effect.

Then there’s the delta strain of the coronavirus. Scattered evidence suggests the viral surge dampened job creation in August, but not enough to put a big dent in hiring plans. Companies have a record number of job openings and their biggest problem is finding enough people to fill them.

So how should investors read the August jobs report? The devil, as always, is in the details.

Pay the closest attention to the increase in private-sector jobs. The U.S. has added an average of 675,000 private job a month from May to July. A similar increase in August would be all systems go for the Fed.

What could also give the report a more positive tenor is another decline in the U.S. unemployment rate, now at 5.4%. Ditto for a sizeable acceleration in hourly wages. An increase in the size of the labor force would also be viewed as a sign more people are looking for work.

Barring a disastrous headline number — way below 500,000 — the central bank is still on track to taper its bond purchases this year. It’s only a question of when.

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