Market Perspective on the Data, Jobs and Debate Over July’s Employment Report

Editors’ Note: MarketMinder is politically agnostic, preferring no politician nor any party. We assess developments for their economic and market implications only.

July’s Employment Situation Report hit the wires Friday, bringing both economic and political angst. Economic, because the Bureau of Labor Statistics (BLS) revised May and June’s job growth down by a combined 258,000 nonfarm payrolls and reported only 73,000 new hirings in July—allegedly evidence the economy is somehow weaker than everyone thought.^[i] And political, because in response to this, President Trump alluded to firing the BLS’s head for somehow politicizing the report. On both fronts, reality looks far more benign to us. This is a simple story of labor markets backwardly confirming weakness other data showed—and of low survey response rates making that confirmation take even longer than usual. Markets are very familiar with both, and nothing here alters our (bullish) outlook for global stocks.

Initially, the BLS reported nonfarm payrolls’ rising by 144,000 in May and 147,000 in June, extending this year’s trend of decent but not rip-roaring jobs growth.^[ii] The revision puts May at 19,000 and June at 14,000, making July’s results an acceleration.^[iii] Big revisions like this aren’t unusual, and it won’t shock us if we continue seeing them regardless of who runs the BLS.

In its release, the BLS notes: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.” Translation: Companies aren’t completing the Establishment Survey in a timely fashion. Pre-COVID, the initial response rate was about 60%.^[iv] Now it is just over 40%, echoing declining response rates around the developed world.^[v] In the UK, response rates have fallen so low that the Office for National Statistics’ (ONS’s) confidence in its labor market data is rock-bottom and they are testing alternative means of measuring employment. Things aren’t quite so dire here, but the large volume of straggling surveys forces statisticians to recalculate the national tallies they impute from survey responses.

In this case, it simply means US labor market data took a while to catch up with what Q2 GDP already showed: Private sector economic activity weakened earlier this year as businesses hunkered down amid uncertainty over tariffs. We saw it in weak private investment, as we discussed earlier this week. We have seen it in US manufacturing purchasing managers’ indexes (PMIs), which have been in contraction for months. Now we are seeing jobs data, which are always late-lagging indicators, confirm it.

Crucially, none of this is sneaking up on markets. Declining survey response rates? Reported by the BLS, discussed ad nauseum among economic eggheads^[vi] and increasingly featured in mainstream coverage, thanks to the ONS’s troubles and the BLS’s discontinuation of some inflation data due to weak coverage. Tariffs’ potential effects, whether on businesses’ willingness to take risk or consumers’ willingness to shop? Pre-priced to a very great degree, based on markets’ rapidly discounting all the worst-case scenario estimates hogging headlines after Liberation Day. Since then, markets have more than recovered, hitting new highs. They did so by climbing through the exact months whose jobs growth the BLS just revised downward, pricing in businesses’ resilience in the face of higher potential costs. Data continue showing businesses are finding ways to cut their tariff liability, helping customs revenues undershoot worst-case estimates.

Markets look forward, pricing in how reality looks likely to unfold relative to expectations over the next 3 – 30 months. Hiring in May, June and July is yesterday’s news, already baked in. What matters for markets from here isn’t how many people got jobs this spring and summer, but how economic activity and corporate earnings will shape up compared to what people expect. Expectations still look pretty blah, with a lot of the worst is yet to come. We are sympathetic to that, as we agree tariffs are a net economic negative and harm the imposing nation most.

However, there is also a lot of evidence that businesses can get over the hump and adapt to less-than-ideal conditions. Rejiggering supply chains may not be the most optimum use of capital, relative to other opportunities. Eating tariffs where consumers are unwilling to shoulder the cost cuts margins. But corporate America entered this stretch in pretty rude health, giving businesses the bandwidth to deal. The steepening yield curve should help deploy the resources to do so, especially if sad jobs data inspire the Fed to cut rates later this year.

Markets don’t need ideal. Or great. Or even necessarily good, provided expectations are low enough. In this case, muddling through probably qualifies as positive surprise. For stocks, that is good enough.