The confusion in the US market continues. After a rough first half of the year, many consensus economists assumed that the July jobs report would show modest growth in the US labor market. Instead, the red-hot report showed that the US added 528,000 new jobs against the 258,000 expected. Moreover, the unemployment rate was lower than expected, too, coming in at 3.5% instead of the expected 3.6%.
This pattern is encouraging for investors who were hoping to see signs that the economy is recovering after lockdowns in 2020 and 2021 sent many workers out of their jobs. The unemployment rate is now back to its 2019 levels and tied for the lowest rate in US history between this year, 1969 and 2019. Wages are also increasing, with hourly earnings jumping 5.2% from this time last year and 0.5% from this time last month.
In a broad sense, this report just shows that the economy is in a stronger spot than some pessimistic investors assumed. “There’s no way to take the other side of this. There’s not a lot of, ‘Yeah, but,’ other than it’s not positive from a market or Fed perspective,” muses Charles Schwab chief investment strategist Liz Ann Sonders. “For the economy, this is good news.”
Report Defies Expectations
The July jobs report flew in the face of expectations. Many economists simply assumed the Federal Reserve’s ongoing interest rate hike program would slow the rate of job creation in the US. Instead, the economy remained robust, and US businesses added nearly double the expected number of new payrolls. However, this doesn’t mean that the Fed is likely to slow its rate of quantitative tightening.
“On the one hand, it gives the Fed more confidence that it can tighten monetary policy without leading to a widespread rise in unemployment,” explains Glassdoor’s lead economist, Daniel Zhao. “But it also shows that the labor market isn’t cooling, or at least wasn’t cooling as fast as anticipated. … At the very least, even though it’s a surprise, I think the Fed is still on track to continue tightening monetary policy.”
This is because the labor market isn’t the final word in the US economy. In a real sense, the economy has cooled dramatically since the start of the year. Gross domestic product output in the US has fallen for two consecutive quarters, which fits some experts’ criteria for a recession. However, with job growth performing so well, some economists call this kind of recession “purely academic”. If everyone has a job and sales are solid, is a “recession” that bad?
Stock Market Rebounds
The stock market rebounded strongly on the jobs report. The Dow Jones bounced up to return to a flat number, an encouraging sign for frustrated investors. The S&P 500, likewise, stabilized to flat after opening down a few points Friday morning. The Nasdaq Composite is still hovering around a 0.1% loss this morning, but it’s much closer to flat than it was at the start of trading. If this performance seems muted given the good news of the July report, it’s got everything to do with the Fed.
“Anybody that jumped on the ‘Fed is going to pivot next year and start cutting rates’ is going to have to get off at the next station, because that’s not in the cards,” explains B. Riley Financial chief market strategist Art Hogan. Still, some optimism is warranted, Hogan admits. “It is clearly a situation where the economy is not screeching or heading into a recession here and now.”
The mixed nature of the news in light of persistent inflation explains why stocks are only flat this morning instead of skyrocketing like some would expect. With the specter of inflation and further rate hikes looming on the horizon, it’s hard to be optimistic about stock performance. The economy will stay locked in a strange semi-frozen limbo until inflation is under control.
Senator Sinema On Board with Energy Bill
Arizona Democratic Senator Kyrsten Sinema, a controversial politician who often shoots down her own party’s proposals, will give Senate Democrats their pivotal fiftieth vote on a landmark energy spending bill. Now, with both Senators Sinema and Joe Manchin on board, Democratic leadership feels confident that they’ll be able to pass a critical element of President Joe Biden’s economic agenda.
The bill will increase taxes on top earners to pay for programs aimed at shoring up the US’s renewable energy resources. This news has been great for the share price of green energy companies, with investors seeing a unique opportunity to profit from a bill that might otherwise eat into their bottom lines.
Once the bill passes the Senate, it’ll need to get through the House of Representatives. Democrats hold a slim majority in the lower chamber, too, so the law isn’t expected to hit any snags in the House. If it passes, it’ll be the single largest achievement of Biden’s presidency so far.