Wall Street braces for jobs report

NEW YORK (CNNMoney.com) -- The monthly jobs report is always among the most anticipated economic readings. But the August report, to be released Friday morning, will get particularly close attention as investors are hoping for weak job numbers since that could convince the Federal Reserve to cut interest rates later this month.

Wall Street expects a net gain of 110,000 jobs to U.S. payrolls in August, according to a consensus estimate of economists. Economists are also predicting that the unemployment rate will remain at 4.6 percent.

Some believe those forecasts are far too bullish in the face of the financial markets turmoil of the last month.

But while a weak jobs report would seem to be another green light for the Fed to cut rates since it would be the latest evidence that the economy is slowing, a much stronger than expected report could create a new conundrum for the central bank, one in which there are questions raised about whether a rate cut is necessary or even wise.

"A 200,000 payroll gain would be a real curveball for everyone," said John Silvia, chief economist for Wachovia. "It would force everyone to look at whether the Fed needs to be cutting."

Ashraf Laidi, chief foreign exchange analyst for CMC Markets, said typically the Fed waits to see a 0.2 percentage point rise in the unemployment rate before cutting rates. That means the unemployment rate would need to inch up to 4.7 percent from the 4.5 percent level that it was at in April through June.

But Laidi pointed out that the Fed did cut rates in 1998 even though the unemployment rate was not rising. That rate cut followed the meltdown at hedge fund Long Term Capital Management.

"That exception was corroborated by the fact that the 1998 easing was largely market-driven and not economic-driven."

Some may point to the crisis in the mortgage market as a similar market-driven situation that also would justify a rate cut.

Still, it is uncertain if the problems caused by the credit crunch in financial markets in August will translate into weakness in the employment picture.

While real estate sales, prices and home construction all clearly hit the skids in August due to the problems in the mortgage markets, construction employment has remained high in the face of a downturn in home building for well over a year.

Commercial and public sector projects used construction workers who had been busy building homes during the boom. In fact, construction employment has managed to eke out a net gain of 9,000 jobs over the last five employment reports, despite the problems in the sector.

Many are also expecting jobs in finance and real estate to take a hit due to the credit crunch. A number of top Wall Street firms shut mortgage operations in August and cut staffs as a result.

A monthly survey by outplacement firm Challenger Gray & Christmas reported Wednesday that August job cuts jumped 85 percent in August to 79,459, with nearly 36,000 layoffs being announced by finance firms, a record for that sector.

But according to the most recent Monster Employment Index, which measures employer job opportunities culled from more than 1,500 different Web sites, including its own online job search service, finance and insurance job listings on the index edged up six points, or 4 percent in August, while job availability in the construction industry rose eight points and is now up 9 percent on a year-over-year basis.

And real estate firms are slow to cut sales agents, even with reduced sales, partly because agents are primarily paid through commission, not fixed salaries. During periods of slower sales, many firms find they need a wider network of agents to maintain clients, listings and deals.

"The real estate business is much different from most businesses," Tom Kunz, CEO of Century 21, told CNNMoney.com last month. "A good real estate company will always be recruiting, no matter what condition of the marketplace. You need to be bringing in new agents, training them, as well as bringing in new experienced agents."

The reason the employment report is getting extra attention this month is that it is rare that it is released so close to a Fed meeting when there is still so much debate about what the central bank will do with rates.

There are some economists who argue that even a much stronger than expected report won't stop the Fed from delivering a rate cut on Sept. 18. Some even are predicting that the Fed will cut rates by a half of a percentage point.

Fed watcher Tom Schlesinger, executive director of Financial Markets Center, said the Fed needs to not place that much emphasis on the employment report since it is a lagging economic indicator. He said the turmoil in the financial markets is too great to ignore.

"I think they're not going to be locked in on the employment report," said Schlesinger. "They always take it into consideration. But I think this is probably a circumstance where if they want to administer a rate cut, the public explanation will focus on unforeseen, deeper and a more protracted set of problems in the housing and mortgage markets than on employment."

Even Silvia said he won't be surprised if the Fed goes ahead with a rate cut - even if unemployment falls and payrolls are much stronger than expected.

"It is highly risky for the Fed to leave rates unchanged again," he said. "Is the Fed really that confident that nothing has changed? I think they'll give the markets the cut they want, the same way a parent on a long drive will say, 'Give the kid in the backseat an ice cream, let him shut up for a half hour, we'll worry about spoiling his dinner later.'"