Some Quick Perspective on August’s Jobs Report

The Bureau of Labor Statistics (BLS) released its widely watched “Employment Situation Summary” (aka, the jobs report) for August today, and based on a perusal of headlines, it was a bit of a stinker. Though payrolls rose, they were far short of expectations—dampening pundits’ moods going into Labor Day weekend. While August’s numbers weren’t particularly revelatory in terms of new news, we think the reaction to the report is more evidence of today’s tempered sentiment—implying the bull market has more wall of worry to climb.

If you took August’s numbers in a vacuum, they would seem pretty growthy. Nonfarm payrolls rose by 235,000—the seventh straight positive month and about 78,000 hires above the pre-COVID median—though far short of consensus expectations, which foresaw 750,000.^[i] August’s tally was also a marked slowdown from July’s upwardly revised 1.1 million.^[ii] Other widely watched labor metrics improved, too. The U-3 rate (the “official unemployment rate,” which refers to the total unemployed as a percent of the civilian labor force) fell to 5.2% from July’s 5.4%.^[iii] The U-6 rate—which casts the widest net, as it includes the total unemployed, those marginally attached to the labor force and those employed part time for economic reasons—also improved slightly, falling from July’s 9.2% to 8.8%.^[iv]

But it was the hiring figures that garnered the most attention, with observers generally blaming the slowdown on the Delta variant. Many highlighted the leisure and hospitality industries in particular, as hiring was flat in August after averaging 350,000 per month over the prior six months.^[v] Based on August’s figures, some expect the Delta variant to continue weighing on hiring for the foreseeable future. Many now also presume the weaker-than-expected jobs numbers will discourage the Fed from slowing its quantitative easing asset purchases (i.e., “tapering”) at its September meeting, arguing the economy still needs central bank “support.” 

These dour reactions aren’t surprising, and we empathize with those who are struggling to find work.^[vi] But from an investing perspective, it is critical to remember surprises move markets most—and nothing in the August jobs report qualifies as a surprise. Take the widespread fretting over Delta. When the Centers for Disease Control and Prevention (CDC) labeled it a “variant of concern” in June, economists were already projecting Delta’s potential economic ramifications as it spread in the UK and Europe. In our view, markets are efficient discounters of widely known information. They pre-priced Delta-related setbacks—and the low probability of sudden, severe lockdowns returning. Even as some locales implemented targeted measures (e.g., mask mandates in California’s Los Angeles County and the Bay Area) stocks kept climbing—they had already moved on, in our view. Besides, the measures implemented are a far cry from last year’s lockdowns.

As for a potential taper delay, we don’t think anyone can predict how Fed officials will interpret August’s jobs numbers—or even how much they will factor into their decision-making. Yes, Fed governors have said their decisions are “data-dependent,” but it isn’t clear which data they track specifically—and how influential any one data series is (or isn’t). Nor do we have any insight about how they will weigh one data point that ticked down after a huge hiring surge in July. Critically, as we discussed recently, tapering likely isn’t bearish anyway. Like the Delta variant, it is too widely watched to be a watershed for stocks, in our view.   

That said, we think the broad reaction to August’s jobs numbers is notable for what it says about sentiment, as it is in line with the dour moods captured by recent sentiment surveys. We have seen pundits argue the weak jobs trend will likely persist into the near future, with Delta making folks skittish and unwilling to spend—which, in turn, discourages businesses from hiring. However, extrapolating late-lagging economic indicators into the future is likely to be a mistake, in our view. Jobs follow growth, not the other way around. Moreover, stocks are the ultimate leading indicator, and we think they have long moved on from the dog days of summer. Keep in mind, too, that stocks move most on the gap between expectations and reality. With the former so low, it likely won’t take much for the latter to positively surprise—and we think that is reason to be bullish today.