While the nonfarm payroll data for August painted a picture of a distinctly softening U.S. economy, the report did not confirm beyond a reasonable doubt that the Federal Reserve needs to be easing by 50 basis points. Headline job growth in August came in slightly below expectations (+142k vs. +165k), but the more notable elements of the report were broad downward revisions to prior months (-85k net). Given the revisions, we are now seeing a picture where headline job growth has been below 125k in four of the last five months, and a three-month moving average payroll growth (+116k) is the slowest since 2012. Remember we are using 2.5% GDP growth this year, but our second half estimate for growth is 1.5% versus 3.0% for the first half, so we have been forecasting a slowing growth environment.
Education & Healthcare, Leisure & Hospitality, and Construction Drove Nearly All of August's Headline Job Gains
Payroll Growth: Major Services & Goods Sectors (Change '000)
What do we think this means for markets?
Overall, we think this report, once economists parse through the numbers, will not be as negatively perceived as some were thinking. To be sure, while negative revisions are noteworthy, our overall message remains the Fed needs to move aggressively, but we are not sure that includes 50 basis points to start – especially since financial conditions are still quite favorable. In the past, 50 basis point easings to start a cycle usually included wider credit spreads and higher unemployment rates. For stocks we still see some downward cyclical pressure in September. We see bonds appreciating a touch, and we expect modest dollar weakness. Our major themes remain intact. Focus on productivity, the Security of Everything, the surge in AI energy demand – and how it will be met, and collateral-based cash flows.
