Fresh jobs data tests how deeply Fed will cut rates ahead of government payroll report

The mixed bag of jobs data, which shows cooling hiring but not firing, comes ahead of the all-important non-farm payroll number due out Friday, which will either reverse the weak July jobs report or confirm it.

Policymakers are wrestling with the question of whether a jump in the unemployment rate to 4.3% in July was due to exogenous factors like the impact of a Texas hurricane at the time, or whether it’s the start of a more worrisome trend.

Economists expect the job market to have rebounded in August, with estimates for 165,000 jobs, compared with 114,000 jobs in the month of July. Both are still below the average monthly gain of 215,000 over the prior 12 months. The unemployment rate is expected to tick down to 4.2% from 4.3%.

“Tomorrow’s payroll report could be softer than expected given the slowdown in ADP estimates,” said Jeffrey Roach, chief economist for LPL Financial. “If the payroll report surprises investors and comes in weaker than expected, the likelihood of a 50 basis point cut increases at the upcoming Fed meeting.”

The July jobs report sent markets into a tailspin, setting off recession fears and sparking questions of whether the Fed had waited too long to cut rates. Another weak jobs report could add to markets' concerns, spurring more selling pressure.

The Fed, which was more focused on inflation over the past few years, is now turning its attention to a weakening job market as officials look to cut rates for the first time in four years this month.