Tonight's non-farm payroll data will provide key information, revealing whether the recent increase in unemployment rate is a temporary fluctuation or the beginning of deeper underlying issues.

The unemployment rate in July has significantly increased, ending the trend of only slight increases over the past year. If the unemployment rate continues to rise in August, economists may be more concerned that the United States may be in a recession or in the early stages of an economic recession. However, if the unemployment rate remains unchanged or decreases slightly as economists expect, the weak data in July may be considered a false alarm.

This answer will be revealed at a critical moment, as the Federal Reserve is preparing for its first interest rate cut since the pandemic in 2020.

Federal Reserve officials have clearly stated that they will cut interest rates at the September meeting. Whether the rate cut will be the usual 25 basis points or a larger 50 basis points may depend on the performance of the labor market. It is rare for such an important decision to depend on one piece of data.

Julia Coronado, founder of the macro-policy perspective research company, said, "This is very important. It will set the tone for the Federal Reserve, and the Fed's decision will affect global monetary policy and markets." The key is what information the data will show.

In the past few months, the US labor market has clearly cooled down. Most notably, the unemployment rate in July rose to 4.3%, a significant change from the 3.4% in April 2023. This unemployment rate is already higher than pre-pandemic levels, and the speed of recent increases has attracted the attention of Federal Reserve officials and labor market economists. Federal Reserve Chairman Powell said in a recent speech,

"We do not want or welcome further cooling of the labor market."

A significant and rapid increase in the unemployment rate typically only occurs during an economic recession, and last month triggered the Sam rule indicating an impending economic downturn. This is also the reason why the recent sharp rise in the unemployment rate has attracted such widespread attention.

However, Claudia Sahm, the founder of this rule and the chief economist of New Century Advisors, does not consider this a signal of an economic recession. Part of the reason is that the rise in the unemployment rate is due to many new entrants to the labor market still searching for suitable positions.

Nevertheless, Sahm stated that the slowdown in labor demand remains a cause for concern, as it implies potential exclusion of workers even if it does not trigger an economic collapse. She stated that the current most worrisome aspect is the labor market trends, the basic expectation is not an economic recession, and there are many reasons to believe that we have not reached that stage yet. However, she added:

"Consequences will still arise even with a slightly softened labor market."

In addition to the rise in the unemployment rate, some other signs also indicate a slowdown in the job market. Since the surge in 2021 and 2022, job vacancies have been steadily decreasing, approaching pre-pandemic levels. The unemployment rate is rising rapidly, especially among those who find it difficult to secure jobs or easily become unemployed in a weak job market, including Black individuals and young people in their early 20s.

However, many economists believe that the job market is not collapsing but rather returning to normalcy after experiencing strong labor demand. Many see the recent slowdown as a benign adjustment.

Some signs indicate that the soft job report in July may be a one-time occurrence. For example, the number of people who lost their jobs due to temporary layoffs surged in July. When this happens, the situation usually reverses in the next set of data. For instance, in August 2010 and October 2013, although there was a surge in temporary layoffs, it quickly subsided. However, it is worth noting that when the surge in temporary layoffs does not quickly fade, as in the early 1980s, the economy indeed entered a recession.

Furthermore, the sharp increase in layoffs in July may be related to adverse weather. Although some analysts initially speculated that Hurricane "Beril" may have caused some people to be unable to work that month, the U.S. Bureau of Labor Statistics and Goldman Sachs economists stated that this may not be the main reason. Temporary layoffs mainly came from the Midwest and California, not the southern region ravaged by the hurricane. However, the hot weather may be part of the reason behind this trend.

Goldman Sachs Chief US Economist David Mericle said, "The extreme high temperatures in California seem to be related to some of the layoffs."

Even if July is not an exception, there are other signs that the job market remains strong. Mericle said, "The baseline scenario is that the situation will improve." He explained that labor demand is returning to normal, although not as strong as in 2022, it has not completely frozen. "It's more like the strength of 2019, not 2022."

Despite a slight increase in initial jobless claims, they remain at a low level. According to Goldman Sachs data, WARN notices, which are used to alert of large-scale layoffs, have not increased significantly.

For the White House, even a slight weakening in the job market could weaken the most prominent part of the Biden administration's economic performance. However, there are pros and cons: if the economic slowdown translates into the Federal Reserve speeding up interest rate cuts, lower borrowing costs could make voters feel better. Christopher Krueger, Managing Director of TD Cowen's Washington research group, said he believes voters are most concerned about the outlook for interest rates and the slowdown in recent price increases.

Krueger said, "Ultimately, voters are most concerned about the prices at the gas station and supermarket, as well as the cost of a happy meal."