A Noticeable Warming on August’s Jobs Report

US hiring has seemingly downshifted in recent months, spurring plenty of chatter about the Fed’s response. There were, of course, murmurs about last month’s slowdown signaling economic weakness. But interestingly, many pundits found forward-looking silver linings in August’s report—and some of that optimism seems misplaced. As ever, sentiment’s evolution is worth monitoring, in our view, and today’s attitudes toward jobs data suggest skepticism is increasingly in the rearview.

Nonfarm payrolls rose by 142,000 in August, stronger than July’s 89,000 (which was revised down from the 114,000 initial estimate) but short of expectations for 160,000.^[i] The unemployment rate matched consensus estimates, ticking down to 4.2% from July’s 4.3%, thanks largely to a reversal in temporary layoffs.^[ii] Those rose in July, contributing to a higher unemployment rate, and August data show temp layoffs declined by -190,000—mostly offsetting the prior month’s increase. Overall, these widely watched labor measures tell a well-known story: Hiring is slowing—but hasn’t stopped—and the unemployment rate remains near cyclical lows.

There were some negative reactions to August’s data. Some pointed out large revisions to past data suggest job growth could have been flat in July and barely positive last month. That, in tandem with a recent annual revision showing monthly payrolls previously overstated job growth by 818,000 in the 12 months ending March 2024, seemingly adds more evidence the labor market is weaker than first thought.

Yet overall, many outlets viewed August’s report favorably, supposedly because a September Fed rate cut is now inevitable—thereby supporting the economy. Instead of will a cut happen, the question is now how big will the cut be? One expert said the Fed must choose between “two roads”: a cut of either 25-basis points (bps) or 50 bps. Interest-rate futures indicate a 51% chance the Fed will cut by 50 bps, up 11 percentage points from yesterday.^[iii] Beyond the Fed, others posit even this slower hiring is still strong enough to support growth, despite the fact employment data lag trends in economic activity.

In our view, these optimistic takes are becoming a bit of a trend. Consider views of the Sahm rule. Earlier in the summer, this alleged recession indicator getting close to triggering (it did so in July) inspired a bunch of coverage about a potential downturn. Now? We haven’t seen many mentions of the Sahm rule at all, even though the indicator ticked up from 0.53 in July to 0.57 in August.^[iv] As many pointed out in past months, readings above 0.5 percentage point supposedly mean the economy is in recession. While we don’t disagree with the rule’s creator and namesake, Claudia Sahm, that the indicator isn’t ironclad, the muted reaction (or now, lack thereof) is still interesting. Sentiment simply looks well removed from the days when any sort of hiring disappointment inspired nonstop handwringing and recession worries. Instead, many commentators seem relieved the labor market is still growthy—with the Fed’s cavalry of rate cuts riding in to help soon.

Now, we agree August’s jobs report doesn’t warrant worry and that overall optimism is sensible—economic conditions simply haven’t been as poor as headlines suggested over the past couple years. ( Remember the recession that never arrived?) That said, it is important to be optimistic for rational reasons. Assuming rate cuts are coming because of a lackluster jobs report doesn’t fit the bill, in our view. Rate cut bullishness presumes monetary policy dictates the economy’s direction (i.e., rate cuts are supposedly positive while hikes are negative). But we know that isn’t the case: This bull market was born among rate hikes, and the US economy never entered recession. Ergo, if hikes aren’t automatically negative, why would cuts be automatically positive?

Instead, we have found cuts often accompany bad times. See: The fast fleet of cuts that failed to forestall or arrest 2008’s bear market or recession. We could go on. That episode highlights another lesson: The Fed and other central banks aren’t prescient and usually react to the economy and markets versus leading them. Historically, when the Fed cuts by a lot, it is playing catchup to weakening economic conditions—just as the past two years’ hikes were their reacting to inflation. We aren’t arguing recession is at hand. Rather, those ascribing vast powers to rate cuts overstate the case dramatically. The Fed is one input to the economic drivers stocks weigh. That is it.

The reaction to August jobs is just one example of warming moods—and nothing to act on at the moment. But it is a sign moods are shifting into optimism and perhaps a warning of some complacency ahead. We are still bullish today, to be clear. But it is always worth monitoring how sentiment aligns with reality.