It's Time to Stop Overanalyzing the Jobs Report

I’m sorry, but even after all this time, the way the market reacts to job reports these days still feels a little weird to me. Call me old fashioned, but isn’t job creation at the very least an essential component of capitalism, if not its greatest virtue? It is the way that the wealth generated by companies is spread around. If no jobs were created, the concentration of that wealth would become so exaggerated as to make crippling regulation or taxation, maybe even an actual revolution, inevitable. So why is the market celebrating relatively weak numbers, as happened initially this morning when non-farm payrolls came in at a significantly less than forecast 209,000, and having a hissy fit when the jobs report is strong?

The obvious answer to that question is that as far as traders are concerned, everything right now is about the Fed. A strong jobs report makes it much more likely that the Fed will hike rates again this month, and maybe again later in the year, which would slow growth and hurt corporate profits, while weakness in the jobs report may scare the Fed into an extended pause. That sounds logical enough, and we certainly have heard it enough times that it has the benefit of familiarity. However, we are at the point where it no longer makes sense, for several reasons.

First and foremost, it is now clear that this bout of inflation was not really being driven by higher wages. In fact, wages lagged prices considerably as input and other costs climbed due to post-pandemic shortages and disruptions. Income levels are simply playing catch up at this point, and an annual rate of increase of 4.4% in hourly earnings, which is what was reported this morning, is consistent with inflation just barely above the Fed’s target range. If wages keep climbing at that rate for some time it will produce inflationary pressure, for sure, but a slower increase in the total jobs in the economy suggests that isn’t going to happen.

What seems to be happening is that traders, and the economists to whom they pay attention, are applying conventional analysis to circumstances that are anything but conventional. The world had never before seen a temporary economic shutdown on the scale seen in the spring of 2020, and we are only now beginning to understand its impact, so applying models that were based on “normal” times is obviously flawed. Wages matter to the individuals receiving them, and wage spiral inflation has been a thing in the past, but the impact of a relatively small increase in the hourly rate on an economy reeling from massive distortion is just about impossible to know at this point.

So, if wages aren’t the prime driver of inflation, a weak jobs report isn’t a reason to celebrate at all. It is just a weak jobs report, and that is never good from a growth perspective. It indicates that the squeeze put on by the Fed is already being felt and, if that is the case, any further hikes could be extremely destructive. And yet, if the Fed focuses on wages, as they have said they will from here on out, another hike looks likely. Maybe the immediate correction back after the initial pop in index futures this morning indicates that traders are beginning to understand that.

The market has become so used to applying convoluted, topsy-turvy analysis to economic data, that they are having a problem breaking the habit. Good has been bad and bad has been good for a while now, but it won’t always be so. As the famous saying goes, misattributed to Freud, “Sometimes a cigar is just a cigar.” The fact is that this report showed an increase in jobs of only 209k, way below the six-month average of 278k, and barely above the neutral level that suggests zero growth. While that may temper the Fed’s hawkishness to some degree, we shouldn’t overlook the fact that it points to economic weakness, which is far from good news. It is time to stop interpreting everything through the filter of how it may be interpreted by Jay Powell and go back to simpler times when bad was bad and good was good.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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