Markets falter, then recover, then falter again with slowing jobs data

MANHATTAN (CN) — The tail end of August proved to be just as poor for Wall Street as the start of the month, and September has begun with little improvement despite a good jobs report that should have turned the tide.

Early in the week, U.S. indices fell as investors continued to deal with recent harsh comments by Federal Reserve on interest rates. On Thursday, after a brief dip following news of new Covid lockdowns in China, markets righted themselves. By the closing bell on Friday, however, indices were back in negative territory, with the Dow Jones Industrial Average losing 965 points this week, the S&P 500 declining 141 points, and the Nasdaq falling 511 points.

Wall Street quickly digested and then ignored another positive payrolls report — the latest in the 20-month streak of job gains — that showed the United States gained 315,000 nonfarm jobs in August. The Bureau of Labor Statistics’ report, which was largely in line with the consensus forecast, pleased many economists but had a transitory effect on markets.

“The economy has never been in recession with job growth at 3.98% on a year-over-year basis, a fact that should quiet the bears out there who claim the economy has fallen off the track,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “The increase in labor supply should help ease the tight labor market and potentially moderate wage growth over the next few months, a welcome sign from an inflationary perspective.”

Although still in positive territory, the payroll report also points to an economic slowing-down, particularly since the unemployment rate increased from 3.5% to 3.7%. That may be a good thing, as it could normalize wage inflation and restrain the overheated economy. Average hourly and weekly earnings increased slightly — it remains at 5.2% annualized for the third straight month — while the job participation rate also inched up to 62.4%.

Jeffrey Roach, chief economist at LPL Financial, noted one red flag with the data: the increase in part-time workers who otherwise would be interested in full-time work. According to the Bureau of Labor Statistics, nonfarm part-time workers increased from 3.9 million to 4.1 million last month, following a 300,000 gain in such workers from July to August.

“The economy is now employing more workers in temporary help services than ever before and this could be a cause for concern,” he said.

The BLS report is also another reason to believe the Federal Reserve may back away from a 0.75% interest rate increase later this month, though most experts believe the proof will be in the price-increase pudding: the next Consumer Price Index, which is set to release on September 13.  

“As for what this means for the Fed, I don’t think much will change,” Peter Boockvar, chief investment officer at Bleakley Advisory Services, wrote in an investors’ note. “They’ll still debate 50 or 75 [basis points] at the next meeting and the CPI figure might be the swing factor.”

Earlier in the week, jobs data from payroll company ADP showed a similar slowdown, with 132,000 jobs gained in August, a fairly steep drop from the 270,000 jobs the company reported were gained in July. The average job gains for 2022 before the August numbers was 376,000 jobs per month.

ADP Chief Economist Nela Richardson said the data suggest more conservative hiring practices among companies girding themselves for a recession, or at least trying to make heads or tails of the “economy’s conflicting signals.”

As the dog days of summer end, a dearth of data did little for investors. On Thursday the ISM manufacturing survey for August showed that prices paid last month remained at 52.4%, the second consecutive month it hit its lowest point since June 2020. Combined with the fact that the survey showed 27 months of ending economic expansion, the ISM survey has justified the belief that peak inflation is behind the economy.

“If a single economic report could exemplify a ‘soft landing’ then that was it, as overall activity was solid (but not spectacular), the prices indices dropped sharply, and new orders implied future growth,” Tom Essaye of the Sevens Report wrote in an investors’ note Friday morning.

He noted also the report drove bond yields higher to the highest level in weeks and “reflects some clear optimism that the looming economic slowdown won’t be as bad as feared some weeks ago.”

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