A Jobs Report That Gives Pause

Sep. 06, 2019 11:07 AM ETSPY, DIA, QQQ, IWM, UPRO, TQQQ5 Comments1 Like
Alexander Veytsman profile picture
Alexander Veytsman


  • September jobs report missed analyst estimates, though higher-than-expected jobs growth is the key problem.
  • The Fed is still likely to cut rates in mid-September, though the case just got harder.
  • Business investment is already on a downward spiral: can further rate cuts revive it?

That’s exactly what this market was not looking for: a lackluster jobs report! It was not terrible; yet, it was indicative of clear macro pressures – and that’s what the volatile August on Wall Street was largely about!

The US economy created approximately 130,000 jobs in August, coming short by 30,000-40,000 of analyst expectations. Adding insult to injury: the private sector added 96,000 jobs, with many new additions being temporary, related to the 2020 Census. The private jobs figure is meaningfully below the 165,000 average from the last twelve months. Meanwhile, employment gains in June and July were revised down by about 20,000 jobs.

However, let us not overlook the biggest problem. Average hourly earnings rose 0.4% on a month/month basis, missing the forecast by 0.2%. This data point sends a clear warning sign to the Federal Reserve that inflationary figures may not be as tame as the FOMC members thought during their May and July meetings. If the proponents of continued rate-cutting want to win over the rest of the FOMC, their chief argument is not so much the slowing of the economy but the moderate pace of inflation. After all, the Fed’s dual mandate is to balance inflation and unemployment. At present, there is a 90%+ expectation by the Street that the Fed will cut rates during their September 17-18 meeting. At a first glance, weaker-than-expected private jobs numbers continue to support that case; on another note, rising wages may pull the Fed in a different direction.

In the end, however, we may still see the Fed continue on its cautious rate-cutting path for the simple reason that jobs data (and consumer spending, which continues to be surprisingly strong) are usually the lagging indicators in the economy. By the time employment numbers turn negative – we may very well be in a recession. Therefore, any private jobs figure below 100,000 is a warning sign. It is important to act preemptively before things get worse.

The September rate cut may end up being another “mid-cycle adjustment”, similar to what Chairman Jay Powell termed the July cut. Over the next six months, it should become quickly evident if the business spending can rebound and sustain the economic expansion. At present, the signs of the downward spiral in investment are being increasingly visible in the lackluster jobs growth: whether or not lower rates (which are already historically low) can reverse this trend is a verdict that is clearly out.

This article was written by

Alexander Veytsman profile picture
Alexander Veytsman's areas of expertise are long/short equities, as well as the macroeconomic trends of the US economy. Opinions expressed in the published articles are exclusively his own, and not affiliated with any company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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