The Fed’s so-called “dual mandate” requires the organization to consider not only how to keep inflation under control, but also how to keep the economy running at or near “full employment.” Until very recently, Fed Chairman Jerome Powell was only working with one side of the mandate – the inflation side.

But all that changed last week when the Fed acknowledged that not only are the risks between inflation and unemployment closer to being balanced, but that the jobs market has weakened enough to force the Fed to begin paying closer attention: “I think the downside risks to the employment mandate are real now,” Powell said. “The time is coming at which it will begin to be appropriate to dial back that level of restriction so that we may address both mandates.” Translation: The Fed is almost as worried about jobs now as it is about inflation, and that means rate cuts are probably coming.

That wasn’t lost on market participants. The market consensus is that the Fed will trim rates by half a point when it meets again in mid-September, not just the quarter-point that Fed orthodoxy might suggest.¹ In some ways, this is exactly what markets have been waiting for. But now that rate cuts might finally be here, investors are taking a step back.

Quite often when the Fed is in a position to begin trimming rates, the economy has already slowed enough that there is a very real threat to the job market and economic growth in general. It certainly felt that way on Friday, when the Bureau of Labor Statistics released its monthly Employment Situation Summary – a catalog of data that includes the unemployment rate (now at 4.3%), non-farm payroll growth (+114,000 in July), and the labor force participation rate (62.8%).² The numbers (except participation rates) were worse than expected and consistent with a job market that is now rolling downhill under its own momentum.

Notably, the Fed’s rate-setting committee didn’t have access to Friday’s data when it issued its latest pause on rates or when Powell tipped his thumb to the job market’s weakness on Wednesday afternoon. That may lead an observer to naturally wonder whether the outcome of Wednesday’ rate decision (or at least the language surrounding it) would’ve been different if they had. But it almost doesn’t matter, because there were other ways to infer labor market weakness as well, including Tuesday’s JOLTS report (which showed that job openings continued to slowly decline, especially in sectors that are tied most closely to economic growth,) and Wednesday’s payrolls preview by ADP, which also came in below estimates.^3,4

Perhaps the most telling of all, though, was tucked inside the Institute of Supply Management’s report on manufacturing, published the day after the Fed’s fateful decision to pause: Through that lens, manufacturing employment has dropped to levels last seen during the three-month span encompassing the worst of the COVID shutdowns (namely, April through June of 2020).⁵

What to watch this week

Coming up next week are Monday’s ISM/PMI readings for the services sector and Thursday’s weekly update on initial jobless claims. A continued ratcheting higher of initial claims wouldn’t be surprising in the wake of Friday’s weak payrolls release, and markets would probably take anything but a huge surprise mostly in stride. That said, any incremental weakness in the labor market is worth paying very close attention to.

The same could probably be said for service-sector data due out Monday. After mixed- to disappointing results for manufacturers last week, the ball appears to be in the process of being passed back to the services sector. If the handoff goes well, the economy might be able to rebuild some momentum. If it instead results in a fumble, economic growth will likely weaken further.

In terms of corporate earnings, we’ve reached the point where it’s more about the sheer number of companies reporting than it is about what any single standout has to say. Roughly 1,400 companies are scheduled to release results between Tuesday and Thursday, and any one of them might have something to say that carries profound implications for the macroeconomic environment.  While that makes it far too hard to comment individually, some potential highlightsinclude rail operator CSX (Monday) and tractor-maker Caterpillar (Tuesday). These types of companies are sometimes forgotten when trends like AI fully capture the market’s imagination, but old-economy stocks sometimes have the clearest line-of-sight into the overall health of the economy. Media giant Disney and retailer Kohl’s (Wednesday and Thursday, respectively) are also good candidates for a cogent thought or two on the economy.