Bad news is good news?
If readers are confused as to why data related to weak job creation just a few weeks ago drove a harshly negative reaction from stock market investors, while similar news today appears to be sending stocks higher, we are quite sympathetic.
The prevailing narrative is that the weak data is now bolstering the case for rate cuts. Fed Chair Jerome Powell speaks in Jackson Hole, Wyoming this Friday (August 23) at the Fed’s annual August symposium, which has been in effect since 1981. Investors are now widely anticipating a dovish pivot. A rate cut of at least of a quarter-point is now priced into bond markets, with additional cuts expected later in the year.
Per the BLS report, nonfarm payrolls for the year through March of 2024 were revised down by 818,000, equivalent to around 68,000 per month. Wall Street strategists were already expecting another downward revision, but generally not this severe. FactSet consensus called for a contraction of 500,000 to 600,000, although there were some estimates that were even higher than what BLS reported.
Is the government manipulating the data?
As the BLS itself noted, the scale of the downward revision very much exceeded normal adjustments. The revision to the unemployment rate was 0.5%, whereas the average adjustment over the past ten years has been closer to 0.1%. The adjustment is the second largest on record, since the Global Financial Crisis of March 2009. The largest shifts this time came in cyclical sectors, like professional and business services (358,000) and leisure and hospitality (150,000).
Given that we are less than three months away from a hotly contested Presidential election, many are wondering if earlier reports that painted a rosier economic picture were biased in some way, perhaps in a manner that favored the incumbent administration. The revised labor report is arguably conveniently timed, since it sets the stage for a pre-election Fed pivot, which as we see this week, would likely be helpful to the stock market (and thereby the Democrats’ election prospects).
We have no evidence, one way or another, to suggest BLS economists deviated from standard practice or techniques when it came to prior estimates. That being said, at a minimum, the scope of the revisions does not instill great confidence in the ability of federal agencies to track the real-time performance of the economy. Survey-based projections and actual reported job claims will naturally deviate, but the gap this time, and at this point in the election cycle, is certainly eye-opening.
Investment implications
Approximately two years of “restrictive” monetary policy appear to be taking their toll on labor markets, as they were explicitly intended to do. The Fed always focused attention on “job openings” through the fairly abstract JOLTS concept. Powell has spoken frequently about reducing the number of unfilled job openings, rather than causing job losses.
Acronyms and complicated statistical metrics like JOLTS may cushion the blow, but the harsh reality is that the main point of Fed tightening has been to injure labor markets and wage growth. We are seeing meaningful evidence now that this is working.
While market chatter turns towards rate cuts, the latest inflation reports still indicate that inflation (with CPI in the vicinity of 2.9%) is running well above target levels around 2%. Given that the Fed has a dual mandate of maximizing employment while preserving monetary stability, the risk is that the battle against inflation ends prematurely.
To prevent what the Fed may consider an unacceptable level of employment weakness, we could see rate cuts materialize before the inflation fighting job is quite done (especially with the election less than three months away).
Gold investors are typically among the first to react to evidence of policy that favors inflationary growth. Unsurprisingly, gold is currently performing quite well and pushing new highs as write, with gold above $2,500 per ounce for the fourth straight day.
