Why Today's Jobs Report May Deliver A Jolt For Dow Jones

The July jobs report may be weak, which would slow Fed rate hikes and help keep the stock market rally alive.

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May 14, 2023 • 4 min read

Dow Jones Industrial Average will suffer if today's jobs report is positive. Investors expect the Federal Reserve to switch from raising rates to cutting them by the middle of 2023, if the economy is weak enough.

A Fed U-turn is unlikely if there's no significant deceleration in June's job gains and the unemployment rate does not increase by a few percentage points. If Wall Street's moderately optimistic consensus estimates for the employment report are accurate (250.000 jobs, 3.6% unemployment and 5% wage increases), that could trip up the Dow Jones.

There's still reason to believe that the July employment report will be weak. This could help keep the current stock-market rally alive.

IBD's analysis of the daily Treasury statements shows a rapid slowdown in the growth of federal employment and income taxes deducted from employee paychecks. The growth rate of these tax collections from mid-May to July 22 was 12%, but it slowed down to 7.6% in the 10 weeks that followed.

Comparatively, the Labor Department’s index of overall pay for June grew by a stronger 9,4% compared to a year earlier. This aggregate figure is a combination of the hourly wage increase (5.1%) and the total number of hours worked in the economy (4.1%).

Comparing the growth rates of aggregate wage income with tax withholdings does not exactly compare apples to apples. Taxes also cover incentive payments and not all labor is taxed the same.

The takeaway is still that recent job reports have not accurately reflected the income growth. This suggests that recent strong job gains, 375,000 per monthly over the last three months, could be revised dramatically lower.

The Labor Department's survey of employers is used to calculate the net hiring figures for each jobs report. The monthly survey of household, which is used for calculating the unemployment rate has shown a weaker trend. Over the past three-month period, the number of employed people fell by an average of 116,000.

This means that layoffs will be necessary to relieve the tightness of the job market, and not simply a higher workforce participation rate.

Initial claims for unemployment benefits also indicate weakness in the Friday jobs report. In the week ending July 30, new claims for unemployment benefits increased to 260,00, up 57% since mid-March. This kind of rise is typical in recessions.

The number of unemployed people who continue to claim unemployment benefits has increased by just 8% and is still at an extremely low rate. These low numbers of continuing claims indicate that people who have been laid off are finding work quickly.

There may be a partial explanation for the low number of continuing claims. In 2020 and 2021, tens of millions claimed unemployment benefits as $300 extra was a deterrent to working. Many people could have reached their maximum benefit eligibility.

The Job Openings Survey and Labor Turnover Survey released this week showed that the number of jobs openings fell by 600,000 from 10.7 millions in June to 10,7 million. This still represents 1.8 jobs per unemployed worker. Not exactly the balance that the Fed is looking for between supply and demand.

Why is the number of job openings at an all-time high despite the fact that we are in a recession? Former Treasury Secretary Larry Summers, and former IMF Chief Economist Olivier Blanchard have proposed that since the pandemic started, the economy is less efficient in matching workers with jobs. They write that if that is the case, then the neutral rate of unemployment, or the noninflationary rate, may be higher than thought.

Jason Draho, strategist at UBS Global Wealth Management writes that the current "bad news is good" market regime will likely continue until one of two events occurs. Either the economy deteriorates too much and sandbags earnings, or wage growth is strong enough to force the Fed into tightening more than Wall Street expected.

UBS is part of the "bear-market rally" camp. Draho wrote that a sustained bull market for risk assets will be unlikely until inflation has fallen to levels acceptable by the Fed and is at an acceptable level.

For now, the good news is that it appears as though the job market has weakened considerably. Nevertheless, some puzzles remain unanswered in the data on jobs. This raises concerns about the medium term. It could take a larger rise in unemployment before wage growth is slowed. This could mean that a Fed pivot will take longer.

The Dow Jones fell 0.3% on Thursday. The S&P500 fell 0.1% while the Nasdaq composite grew 0.4%.

The Dow Jones Industrial Average has gained 9.5% since its closing low on June 17, reducing its loss from the peak of January 4, to just 11.1%. S&P 500 is up 13.2% from mid-June and has climbed to within 13.4% its closing record high. The Nasdaq Composite has risen 19.5% since its bear-market bottom, but is still 20.8% off its record high.

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