What the Markets Got Wrong About the Latest Economic Data

Shah Gilani|September 6, 2024

If there were ever a time to ignore the noise… it’s now.

This morning, all eyes were on the Labor Department’s payroll numbers… wage growth numbers… weekly hours worked… and of course, the nation’s unemployment rate.

Traders and investors were ready to sell stocks if the numbers showed the economy suddenly screeching to a halt.

It didn’t screech to a halt… but they started selling anyway.

Here’s a reality check for them… Economic growth is slowing at just the right pace.

In fact, today’s measures combined with other recent economic reports show the economy only modestly tempering its steady growth.

That means traders and investors should get back to betting on rising stocks and markets… instead of panicking over “not bad enough” economic numbers that they think mean the Fed may not cut rates by 50 basis points as expected.

Here’s why…

Good News Is Bad News

Payrolls increased by 142,000 in August. Consensus estimates were for 165k jobs to be filled.

However, since July’s payroll additions were revised down by 86k, the August increase was “good” news.

Hourly wages increased by a tenth of a percentage point, or up 0.4%, on the month. That’s better than analysts’ estimates for a 0.3% gain.

Weekly hours worked held steady. The nation’s unemployment rate fell one-tenth of a percent to 4.2%.

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The labor market is slowing just enough for the Fed to start a rate-cutting regime.

And this is backed by this week’s data from the Fed’s Beige Book…

Strong but Slowing

The Fed’s Beige Book, which provides insights from the Fed’s 12 districts across the U.S., reveals a nuanced picture of a U.S. economy that remains strong but is showing signs of slowing.

Here are the key points:

• Economic Activity: Most districts are experiencing flat or declining economic activity. However, this does not mean a recession is coming. For the most part, businesses report a slowdown rather than a contraction. That’s a big difference. Some districts are seeing growth. There is cautious optimism for stabilization or slight improvement in the coming months.
• Employment Levels: Employment levels are largely stable or experiencing slight increases. This is a slowdown compared to the previous period but not a cause for alarm. The pace of job growth has moderated, layoffs remain rare, and overall job market conditions suggest a cooling rather than a collapse.
• Wage Growth: Wage growth has slowed, but it’s still growing and in line with broader economic trends. That’s consistent with a cooling labor market where competition for workers is easing, leading to some wage pressure.
• Inflation and Prices: Inflation concerns have eased. The Beige Book notes a reduction in references to inflationary pressures. That suggests that cost increases are stabilizing, if not easing. Price pressures are expected to remain stable or decline further in the coming months.

The Fed is closely monitoring these developments and has expressed the need to adjust monetary policy to support economic stability (i.e., with rate cuts).

The Beige Book also reported on specific sectors of the economy… again the results point to a modest slowdown.

Not Too Hot, Not Too Cold

There has been a slight decrease in consumer spending (go here for my take on Walmart and Target), thanks to heightened budget consciousness among consumers. However, this does not signal a severe downturn but rather a moderated pace of spending.

Auto sales and manufacturing activity have shown mixed results. There are areas with declines due to high interest rates and inventory issues.

Residential construction and real estate activity have also been varied, with some areas experiencing softness in home sales.

Recent declines in WTI crude prices point to weaker commodity price fundamentals. But historical patterns show us that lower oil prices often extend economic cycles rather than end them.

All this data is to say the current economic slowdown does not mean a recession is imminent… or that the economy is too strong for the Fed to cut rates.

These reports are subject to two-way interpretation. That’s why traders and investors are always looking for the next headline… the next economic update… the next earnings report… to commit to their capital.

I get that.

But it’s not going to make you money.

Getting the big picture right is what makes traders and investors successful.

The Trend Says…

Here’s the big picture… The economy is still growing, the labor market is still strong, and not every measure or metric – especially taken on their own – really matters.

That’s because the trend is your friend. And the trend as far as economic growth goes is still up. The trend as far as the stock market goes is still up.

The Fed’s highly anticipated rate-cutting regime and current economic indicators suggest that while growth is moderating, there is no cause for alarm regarding a recession. There’s no cause for alarm regarding a stock market collapse.

The ongoing adjustments in monetary policy are aimed at ensuring a smooth economic transition and addressing the current slowdown without causing a severe downturn.

For anyone who hasn’t gotten the memo over the past three decades… when the Fed cuts rates and keeps cutting them, stocks go up.

And we’ll be profiting along the way.