The Bureau of Labor Statistics’ jobs report for August has just been released. The numbers seem at first glance to be strong, but stocks are reacting by moving lower. This demonstrates a topsy-turvy world that we have become used to where good news is bad for stocks, but maybe it is time to move on from that.
The market, which in this case refers to the collective wisdom of traders, investors, analysts and commentators, has, for the last few years, seen strong jobs data as a reason to worry that the Fed will hike rates faster than expected. Good news is therefore perceived as bad for stocks. That made sense when the timing and pace of rate hikes was unclear, but that is no longer the case, and it is time to let go of the obsession with the Fed and see signs of economic strength as just that.
From that perspective, this is a very strong report. Non-Farm Payrolls increased by 201,000 in August, comfortably beating expectations for 190,000 new jobs in the economy. The headline unemployment rate remained at 3.9%, a level that many economists regard as effectively full employment in today’s job market.
That continues a long-standing trend of significant increases in jobs, but the danger to stocks is seen as coming from another part of the report, wage growth.
Average hourly wages grew by a better than expected 0.4% on a month by month basis, taking the annual increase to 2.9%. That is what, as I said earlier this week, will have caused concern from traders and led to selling in the immediate aftermath of the report. The thinking is that as the job market tightens and wages rise as a result, it will result in inflationary pressure that will prompt the Fed to hike rates.
That is a logical argument that conforms with economic theory, and indeed is one that I have made in the past. The problem now, however, is that it ignores what we already know about the Fed and what is actually happening in the U.S. economy.
Wages have been slow to rise during the recovery from the recession, but the conditions for upward pressure have been in place for some time, and the Fed is, and has for a long time been, aware of that. When Janet Yellen started the normalization of interest rates several years ago it had the effect of partially offsetting that pressure and keeping wage increases to a manageable level.
You may believe that that is politically undesirable, or even that it is a sign of a vast conspiracy to undermine working people, but from an economic perspective it has been successful. We are now in a place where the economy has been growing pretty consistently for nearly a decade, but core inflation has only just hit the Fed’s 2% target rate.
Now that we are seeing increased wage growth, the Fed can look at it in one of two ways. They could say that it represents a danger, or they could see it as a confirmation that their softly-softly approach of slow, incremental increases in interest rates was correct all along. Human nature dictates that the second view is more likely, so there will be little incentive to change a winning strategy.
That is not to say that there aren’t some real dangers to the kind of stock market performance that we have become accustomed to. The trade situation is an obvious one, as is political instability. In the grand scheme of things though, both of those are transient issues. More worrying to me is the ballooning federal debt and deficit, but if the ill effects of that are felt it won’t be for some time.
So, if a strong jobs report such as this morning’s is unlikely to shift the Fed from its course and the potential problems are either probably short-lived or a long way in the future, we are left with numbers that show economic strength, business confidence and conditions that will prompt continued steady growth in consumer activity. Maybe it is time to take that at face value and stop looking for the big black cloud in front of the silver lining.