Digesting a Disappointing Jobs Report

By Brian Hershberg | Friday, October 8

Help Still Wanted. Major U.S. stock indexes flitted between small gains and losses before ending lower on Jobs Friday, as September's nonfarm payrolls report failed to show the mass return to work that many economists, policy makers, and investors had exepcted. 

Indexes managed to hold on to weekly gains, however. The Dow Jones Industrial Average added 1.2% to end the week at 34,746.25, the S&P 500 was up 0.8% at 4391.34, and the Nasdaq Composite was up 0.1% at 14,579.54. 

American businesses added 194,000 jobs in September, well below the 479,000 that economists polled by FactSet had predicted, writes Barron's reporter Lisa Beilfuss. The unemployment rate fell to 4.8%, the lowest since March 2020, but the decline was largely due to a drop in the labor-force participation rate. Wages rose 0.6% from August.

There were plenty of reasons to look beyond the soft headline figures in the jobs report, including solid revisions to July and August figures and the continuing impact of the Covid-19 Delta variant. And Wall Street economists and strategists still largely expect the Federal Reserve to begin winding down its emergency bond-buying program in coming months. To wit: 

“The disappointing 194,000 gain in non-farm payrolls in September probably still counts as ‘decent’ enough for the Fed to begin tapering its asset purchases next month,” says Andrew Hunter, economist at Capital Economics. “But alongside signs that activity growth is slowing sharply, at the same time as worsening labor shortages are putting serious upward pressure on wage growth, it looks set to leave Fed officials in an uncomfortable position over the coming months.”

Indeed, while the central bank is likely satisfied that it can pare back on bond buying as the economy and labor market return toward pre-Covid levels, it has said its bar for raising interest rates is higher. And on that front, policy may be behind the curve.

Michael Darda, chief economist at MKM Partners, notes that the labor force is still down about 4.9 million since the start of the pandemic, and it increasingly looks like many of the displaced may not return. That means they are effectively out of the labor supply equation and shouldn’t be counted in measures of slack that have justified the Fed's extraordinarily easy monetary policies.

As the Fed waits for millions to return to work before lifting interest rates, inflation continues to build. “The reality is nominal demand is back to its pre-Covid trend growth path and likely to continue growing much faster than [capacity] as the pandemic recedes and the economy reopens into a nearly $4 trillion wall of money/spendable assets,” says Darda.

That's why this job report should be seen more as an inflation signal for the Fed than a labor market signal, Lisa writes in The Economy column: 

If millions of workers are gone for good, it’s a much different story than the one the Fed is telling. For all officials’ talk of tools to deal with inflation, there really is just one: Interest rates will have to rise sooner and faster.

And that wouldn't be a trend favoring continued stock-market gains.

Watch our TV show on Fox Business Friday at 9 p.m. or 10:30 p.m.; Saturday at 11 a.m.; or Sunday at 10 a.m. or 11:30 a.m. This week, see an interview with David Giroux, manager of the T. Rowe Price Capital Appreciation fund, on the outlook for stocks.

DJIA: -0.03% to 34,746.25
S&P 500: -0.19% to 4,391.34
Nasdaq: -0.51% to 14,579.54

The Hot Stock: APA +6.8%
The Biggest Loser: Citrix Systems -5.7%

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Worst Sectors: Real Estate -1.1%