A solid jobs report on Friday will be bad news for the Dow Jones Industrial Average. Investors are counting on the economy being weak enough for the Federal Reserve to shift from rate hiking to rate cutting in the first half of 2023.
Jobs Report Expectations
Anything short of a notable deceleration from June’s reported 372,000 job gain and a tick up in the 3.6% unemployment rate will cast doubt on a Fed U-turn scenario. If Wall Street’s moderately strong consensus estimates for the jobs report (250,000 jobs, 3.6% unemployment and 5% wage growth) are on target, that might trip up the Dow Jones.
Yet there’s reason to think that the July jobs report will be weak, helping keep the current stock market rally alive.
Tax Withholdings Slow
An IBD analysis of daily Treasury statements indicates a sharp deceleration in the growth rate of federal income and employment taxes withheld from worker paychecks. In the 10 weeks through July 22, growth in those tax collections vs. a year ago slowed to 7.6% from a 12% pace through mid-May.
By comparison, the Labor Department’s index of economywide pay grew a stronger 9.4% from a year ago in June. That aggregate pay figure reflects hourly wage growth (5.1%) and the increase in total hours worked across the economy (4.1%).
The growth rate comparison between aggregate wage income and tax withholdings isn’t exactly apples-to-apples. The taxes also cover incentive pay and not all labor income is taxed at the same rate.
Still, the take-away is that income gains are well short of that implied by recent jobs reports. That suggests a good chance that strong recent job gains — 375,000 per month over the past three months — could be revised sharply lower.
Each jobs report’s net-hiring figures come from the Labor Department’s employer survey. By contrast, the monthly survey of households, which is used to derive the unemployment rate, has shown a much weaker trend, with the ranks of the employed falling an average 116,000 pace over the past three months.
Yet despite that weakness, the unemployment rate has been holding at 3.6%, one tick above a half-century low. Even more concerning, the employment-to-population ratio is holding near multiyear highs for every age group except 65 and older. That implies layoffs, not just higher workforce participation, will be needed to ease job market tightness.
Initial jobless claims also point to weakness in Friday’s jobs report. New claims for unemployment benefits rose to 260,000 in the week of July 30, up 57% from mid-March. That kind of increase typically occurs in a recession.
However, the ranks of the unemployed continuing to claim jobless benefits has climbed just 8%, remaining at an extremely low level. The still-low continuing claims suggest that those hit with layoffs are quickly finding new employment.
But there may be another partial explanation to low continuing claims. Tens of millions of people claimed jobless benefits in 2020 and 2021, as an extra $300 provided a disincentive to work. As a result, many people may have exhausted their eligibility for benefits.
This week’s Job Openings and Labor Turnover Survey showed the number of job openings falling 600,000 to 10.7 million in June. That still means 1.8 job openings per unemployed worker, not exactly the balance between labor demand and supply that the Fed wants.
Why are job openings so historically high, even as the economy is having a brush with recession? One theory, offered by former Treasury Secretary Larry Summers and former IMF chief economist Olivier Blanchard, is that the economy has become less efficient at matching workers to jobs since the pandemic began. If that’s the case, it implies that the neutral, or noninflationary, rate of unemployment is higher than believed, they write.
Dow Jones Outlook
“The ‘bad news is good news’ current market regime is likely to continue,” until one of two things happens, writes UBS Global Wealth Management strategist Jason Draho. Either the economy weakens too much, sandbagging earnings, or strong wage growth forces the Fed to tighten more or faster than Wall Street expects.
UBS is in the “bear market rally” camp. “Until inflation is convincingly falling to acceptable levels and the Fed has undoubtedly pivoted, a new sustained bull market in risk assets is unlikely,” Draho wrote.
The good bad news for now is that the job market appears to have weakened significantly. Yet some unanswered puzzles in the jobs data raise concern about the intermediate term. It may take a bigger rise in unemployment to really bring down wage growth. That may mean a longer path to a Fed pivot.
In Thursday stock market action, the Dow Jones dipped 0.2%. The S&P 500 eased 0.1%, while the Nasdaq composite lost 0.1% in morning trade.
Through Wednesday, the Dow rallied 9.8% from its June 17 closing low, cutting its loss to 10.8% from its Jan. 4 closing peak. The S&P 500 has rallied 13.3% since mid-June, climbing to within 13.4% of its all-time closing high. The Nasdaq composite has advanced 19% from its bear-market low, but remains 21.1% below its record high.
Be sure to read IBD’s daily The Big Picture column after every trading day to stay on top of the market trend and what it means for your trading decisions.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
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