The August jobs report, released last Friday, confirmed what markets had anticipated after July’s slowdown and previous downward revisions: the streak of consistent labor market growth has come to an end.
Data revealed that the U.S. economy added just 22,000 jobs in August — significantly below economists’ expectations of 75,000 — while the unemployment rate ticked up from 4.2% to 4.3%.
Revisions to prior months showed the labor market was weaker than previously believed. June’s job growth was revised down into negative territory, at -13,000 jobs, and July showed below-average growth compared to last year — marking three consecutive months of declining momentum.
That’s more than enough to establish a trend.
Since the probability of a Federal Reserve rate cut in September was already priced in at 90%, the weak report had little to no positive impact on the markets — a stark contrast from past reactions.
Following the post-COVID surge in inflation and interest rate hikes, investors had been eager for any signal that might push the Fed to reverse course. With inflation proving stubborn, a cooling labor market was seen as a potential catalyst to force the Fed’s hand.
Hence, the idea that “bad news is good news” gained traction.
While job losses, stalled career paths, and corporate layoffs are hardly welcome developments for households, a shrinking labor market typically signals that central banks will step in to stimulate growth — lowering borrowing costs for businesses and consumers alike.
But this time, markets had already priced in a Fed rescue. The weak August numbers may have solidified expectations for a September rate cut — and increased the likelihood of further cuts in October and December — but investors are now also weighing the growing risks of a recession.
And so, when it comes to jobs reports and broader macro data, bad news may once again just be bad news.
From here on out, the economy is walking a fine line: investors are hoping for a “Goldilocks” scenario where the economy is strong enough to sustain growth, but weak enough to justify continued easing.
There’s no denying that equity markets favor lower rates. But the reason behind the need for those cuts matters just as much.
Wall Street’s gains are ultimately driven by earnings — and positive earnings are difficult to achieve in a struggling economy.
As markets took time to digest what increasingly looks like a summer stall, compounded by the lingering effects of tariffs, investors pushed equities into the red.
