Summary
Gauging the Economy As we await the September FOMC meeting, we are reminded that a well-known (though unofficial) rule of Wall Street is that bad news can be good news or bad news, and good news can be bad news or good news. The thinking is a certain kind of bad or good news (say a big miss/beat on GDP growth) can spark a policy response (a Fed rate cut/hike) that the market perceives as positive/negative. We have seen this unofficial rule in action in the past few weeks, as the stock market has risen despite unequivocally bad news from the employment economy. The most closely watched barometer of bond market sentiment, the CME FedWatch Tool, is now signaling that the Fed may take a more dovish approach to monetary policy (more rate cuts) over its next three Federal Open Market Committee (FOMC) meetings. That has given a jolt to stock investors searching for reasons to continue liking a stock rally that is otherwise showing signs of fatigue. The Fed continues to walk a fine line. Recent inflation data suggests that a hawkish approach to monetary policy (fewer rate cuts) might be equally valid. The Fed’s preferred inflation gauge, the core PCE index, posted an annual change of 2.9% for July; that was one tick above the 2.8% consensus forecast and up from 2.8% for June. Too much stimulus could revive inflation and undo the Fed’s painful but successful policy maneuverings of the past three years. The CPI and PPI data for August will provide the final inputs on inflation ahead of the September 16-17 FOMC meeting. The Jobs Economy Has Weakened Investors were stunned by July nonfarm payrolls data released at the beginning of August, showing average jobs monthly growth of just 35,000 over the May-July period. Markets moved higher across August, but a lot of that was repositioning out of formerly winning trades and into less-crowded parts of the stock market. The August gain represented a fourth straight monthly win for the S&P 500 — but at 1.0% was the weakest of the four, after gains of 6.2% for May, 5.0% for June, and 3.0% for July. Economists and strategists expected some recovery in August nonfarm payrolls, with the consensus calling for 75,000 new jobs. Instead, August nonfarm payrolls rose by just 22,000. The net of July and June payrolls was revised lower, resulting in three-month average nonfarm payrolls growth of just 29,000; June was actually revised to a loss of 13,000 jobs. Employment increased in healthcare and social assistance, which are relatively lower-wage areas, and decreased in manufacturing and federal government, which are relatively higher-wage areas. The 97,000 decline in federal employment since January, according to Argus Director of Economic Strategy Chris Graja, CFA, is below the 292,000 federal layoffs counted this year by outplacement firm Challenger, Gray, and Christmas. As severance runs out for this group, they likely will contribute to the negative trend in employment. Unemployment ticked up for a second straight month, to 4.3% for August after rising to 4.2% in July from 4.1% in June. Annual wage growth slipped to 3.7% in August from 3.9% in July. The average workweek was unchanged at 34.2 hours. Years-long consumer spending momentum from higher hourly wages for more hours worked is at risk of petering out. Uncertainty about the economic outlook and the impact of tariff policy appears to be leading employers to slow their hiring plans. The stock and bond markets weakened to start September following a federal appeals court ruling disallowing President Trump’s use of emergency powers to levy tariffs. For now, tariffs put in place for a multitude of countries as of August 1 still stand. Economists mostly continue to dislike tariffs. But rollback of tariffs would require them to be paid back at a time when traditional tax receipts to the Treasury have weakened in a softish economy. The Bond Market Expects More Cuts Many economists were looking for recovery from weak July jobs data — but instead got even weaker August data. Investors concluded that the Fed would have no choice but to become more dovish across its next three policy meetings. The stock market rose on nonfarm payrolls Friday (9/5/25) in a classic ‘bad is good’ rally. Interestingly, a ‘meh’ jobs report would have made the Fed’s path forward even more unclear. If August payrolls had grown by the consensus amount of 75,000 and if June and July had both been revised upward, the economy would still be perceived as softening; and the Fed would still likely cut rates twice in the final four months of 2025. But the market has been pricing that in at least since mid-2025, if not earlier. A very strong August jobs report might have taken one of those two counted-on rate cuts off the table, which would not have pleased the stock market (nor the White House). On the other hand, a deeply negative August nonfarm payrolls reading might have triggered a ‘bad is bad’ response, sending stocks lower. Negative payrolls might have led investors to conclude that the combination of White House tariff and immigration policy and too-restrictive Fed monetary policy had tipped the economy toward a recession that might prove to be inevitable. Instead of any of those alternatives, stock investors were gifted a ‘Goldilocks’ jobs report for August. The current fed funds target range is
