With conditions in the job market key to the evolution of U.S. monetary policy, the latest data suggests that the U.S. Federal Reserve Board should be cutting rates, says National Bank Financial Inc. (NBF).
In a new report, NBF noted that the U.S. government shutdown left the market, and policymakers, in the dark about the evolution of the labour market — and, turning to alternative indicators for insight into the state of employment.
The ADP report on private employment published on Wednesday “has certainly given ammunition to the pessimists,” NBF said, noting that it showed a 32,000 decline in payrolls.
“But beyond the headline figure, it was the details of the report that caught our attention,” it said. “These showed that the weakness was concentrated among small businesses, where the number of jobs fell by no less than 120,000 during the month, the most since the pandemic.”
This reflects an ongoing trend, NBF said, with small business employment now down by 264,000 since its peak in April.
This decline among small businesses has, until now, been largely offset by payroll increases among larger firms, it noted — but recent weakness among larger companies “has only increased the risk in our view,” NBF said.
As a result, it believes that the Fed should “err on the side of caution and lower its policy rates at its last meeting of the year.”