Downside. A somewhat more possible surprise is to the downside. With growth revised down and productivity suffering, companies may focus more on efficiency and investment rather than hiring. Although this will probably show up at some point, there are few signs it is happening now.
A bigger risk is seasonality. One analyst noted that since the financial crisis, the August jobs report has disappointed five of seven times. I don’t really like arguing from history, but this does suggest some form of seasonal misestimate that raises the chances of an apparent substantial decline in job growth. If so, expect talk of a rate hike to be dialed back, as we have seen before.
So What Should We Expect?
Overall, job growth will most likely come in around the expected level, which would be both healthy and sustainable. This would also be the best outcome for the economy as a whole and for financial markets. Of the two possible surprises, the shortfall is perhaps more likely, but it would largely be due to technical and seasonal factors rather than to a substantial slowdown, limiting the real economic impact. In fact, by reducing the chances of a near-term rate increase, the effect could end up being positive for financial markets.
Conversely, a stronger-than-expected report (of, say, over 220,000 or so) would be positive for economic growth, but by raising pressure for a rate hike, it might end up being negative for markets. In this case, however, the damage from higher rates would be offset by the stronger economic growth such a high level of job growth would create.
The bottom line is that unless we get a seriously weak report, which is not expected, the economic consequences will be largely positive, while the impact on the financial markets will be mixed to positive. The economy as a whole remains in growth mode, with employment in particular doing very well, and tomorrow's report should continue to reflect that.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.