The Federal Reserve's interest rate cut path may have become essentially clear.

The U.S. Department of Labor released employment data for August on September 6th, showing that the U.S. added 142,000 jobs in August, with the unemployment rate dropping from 4.3% in the previous month to 4.2%; the labor force participation rate remained at 62.7%; the average weekly hours worked increased slightly by 0.1 hours to 34.3 hours; the average hourly wage increased by 0.4% month-on-month, higher than the previous month's 0.2%, and also rose year-on-year from 3.6% in the previous month to 3.8%. At the same time, the new employment data for July and June were revised down from 114,000 and 179,000 to 89,000 and 118,000 respectively, with a total revision of 86,000 for the two months.

With less than two weeks to go before the Federal Reserve's September interest rate meeting, the aforementioned data is highly anticipated and closely watched. Its importance in Federal Reserve decision-making exceeds that of usual months, and its impact on the market is also greater, even surpassing the employment data released for July last month. On the surface, the data is mixed and ambiguous, but the majority believe that the number of new jobs added was less than expected, especially with significant revisions for June and July, increasing the risk of economic recession. However, some analyses suggest that the employment situation has improved, and the outlook is more optimistic.

In fact, by understanding the Federal Reserve's decision-making logic, "unclear" is very clear: employment has not deteriorated, and inflation is still above the 2% target, so there is no need for aggressive rate cuts. It is highly likely that the usual 25 basis point rate cut will be implemented this month; barring any major surprises, the November and December meetings later this year will also likely see rate cuts of 25 basis points each, and next year will continue to adjust and observe the economic and financial situation, deciding on specific policies at each meeting.

Looking at the new employment data, the U.S. data for August is not bad, and it even shows a clear increase compared to the previous two months after the revision. However, compared to the average monthly increase of 202,000 over the past 12 months, it is not as good. Employment data for August is usually relatively weak and is later revised upwards. The education sector typically increases hiring in this month, but the start times of the new school year vary across the country, which may be a seasonal factor that needs to be excluded when conducting statistics. In the past 13 years, the initial employment numbers for August have been revised upwards in 10 years. As of August this year, employment data for the past four months has been consecutively revised downwards, and in the past seven months, there have been six revisions, some with significant adjustments. The high rate of data revision again indicates that this data is not very reliable and, in fact, not as important. In contrast, the unemployment rate, which has never been revised, is truly important and deserves attention, and it is also the core indicator that the Federal Reserve pays more attention to.

From the perspective of the unemployment rate, the decline in August is good news. In August, the labor force increased by 120,000, the total employed population rose by 168,000, the number of unemployed increased by 48,000, the number of temporary layoffs decreased by 190,000, and the number of permanent unemployed remained at 1.7 million, basically unchanged, proving that the rise in the unemployment rate in July was indeed due to weather factors and still has some continuation. As of the end of August, the unemployment rate among those holding unemployment insurance remained stable at a low level of 1.2%, and the number of initial jobless claims per week has dropped from 250,000 at the end of July to 227,000; the resignation rate in August was 2.1%, and the layoff rate was 1.2%, both marginally increasing by 0.1 percentage points from July, but still in a historically low range, indicating that the rise in the unemployment rate was mainly not due to an increase in layoffs, but due to an increase in labor supply, with more job seekers not finding suitable jobs in a short period of time. The Sam Rule mainly reflects the increase in unemployment caused by a decrease in demand in the past, leading to economic recession, which is the opposite of the current situation, so the Sam Rule continues to fail.

Looking at the labor gap, in July, the total labor gap in the U.S. (total employment + job vacancies - labor force population) decreased from 590,000 in June to 510,000, continuing the downward trend and basically returning to the pre-pandemic level, indicating that the labor market rebalance may have been completed; in August, the labor force participation rate remained unchanged, and the unemployment rate changed little, showing that the overall trend of the labor market is relatively stable, basically achieving full employment, and the downward trend in new employment is normal. Further observation of the growth rate of total wages and the employment diffusion index shows that the current wage growth rate is still relatively high, and the employment diffusion index is not significantly below 50, both indicating that employment has not deteriorated.

From the overall economy, U.S. consumer spending in July increased beyond expectations, and wage growth accelerated in August, with families in relatively good financial health, strong market demand, and the economy continuing to grow. In particular, the 3.8% year-on-year increase in average hourly wages not only outperformed inflation but also continued to support consumer spending and economic growth, and it is below the key 4%, which is helpful for inflation to continue to decline, in line with the growth rate needed to reduce inflation to the 2% target. In August, the weekly working hours were slightly higher than in July, and with the unemployment rate relatively stable, the subsequent wage growth rate may remain stable at the current level, which is of great significance for maintaining consumer spending and the resilience of the entire economy. Although the ISM manufacturing PMI index in August is still in the contraction range, it has warmed up compared to July. The Markit services PMI index is 55.2, higher than expected and the previous value, and the ISM services PMI index is 51.4, also slightly higher than expected and the previous value, indicating that the prosperity of the service industry, which is the main body of the U.S. economy, is still good. Consumer confidence has slightly rebounded, with the University of Michigan's consumer confidence index in August at 67.9, all higher than expected and the previous value.

In summary, employment data and other economic indicators show that U.S. employment and the overall economy are gradually and continuously slowing down and cooling down, and are currently in a balanced state, with no signs of recession, although many traditional indicators show otherwise. At the same time, although the unemployment rate in August is slightly lower than in July, it is still higher than in June, and the overall trend is upward, indicating that employment and the economy have reached a critical point. If the current trend continues, the risk of recession will increase, and it may even fall into a real recession. The Federal Reserve's rate cut will help to stop this trend, but in the absence of a major unexpected shock, there is no need for aggressive rate cuts. A routine rate cut of 25 basis points may achieve the goal, that is, to continue to reduce inflation to the 2% target while preventing a recession.