"The numbers don't lie": Why did stocks rise after an unexpectedly poor jobs report?

July turned out to be one of the worst months for the U.S. job market in recent memory, according to Business Insider. Contrary to expectations, the number of jobs declined in July—not even the World Cup could help. Economists are still struggling to explain the data. Meanwhile, investors view the weak labor market as a positive factor for the stock market—and are buying up stocks.

In July, U.S. employers unexpectedly cut 23,000 jobs in the nonfarm sector, according to data from the Bureau of Labor Statistics released on August 7. Authorities also revised downward the employment figures for the previous two months. It turned out that in May and June, the U.S. economy added 103,000 fewer jobs than previously reported.

Separately, a monthly survey by the U.S. Department of Labor showed that an increasing number of Americans are leaving the workforce. As a result, the unemployment rate fell from 4.2% in June to 4.1%, even though the number of employed people declined.

First, the labor market turned out to be weaker than expected. Ahead of the data release, economists had forecast an increase of 83,000 jobs, not a decline.

Second, the job losses in specific sectors also came as a surprise. For example, after the public sector, the leisure and hospitality sector was hit hardest by the job losses. Employment in that sector fell to its lowest level in nearly a year—despite the World Cup, which was partially held in the U.S. and ended on July 19. There were also job losses in this sector in June, although analysts had expected the tournament to prompt bars, restaurants, and hotels to actively hire additional staff.

"I think something's off here. Something doesn't add up," said Dan North, senior economist at Allianz Trade North America, in an interview with Seeking Alpha about the industry's June layoffs.

The July data also don’t look convincing, said Stephen Stanley, chief economist at Santander US Capital Markets. “These figures are consistent with what we’re seeing in the labor market as a whole,” Bloomberg quoted him as saying. “If the labor market had really weakened as much as the June and July employment data suggest, we would have already heard about it from the Fed and seen it reflected in the state of the economy. But that’s not the case.”

The weak July data can likely be partly attributed to statistical distortions, suggests Eric Vinograd, an economist at AllianceBernstein. However, a large-scale revision of data for previous months “is not so easy to explain,” the WSJ quotes him as saying.

Monthly revisions to employment data are common practice, as many of the employers surveyed respond late, the publication explains. But a significant downward revision in July marks the second consecutive year this has happened, which may prompt economists to seek an explanation for this pattern, the WSJ notes. A year ago, the figures for May and June were revised downward by a total of 258,000 jobs. This so angered U.S. President Donald Trump that he fired Bureau of Labor Statistics Director Erica McEntarfer that same day, accusing her of falsifying data.

Economists are also unable to find a clear explanation for the fact that the U.S. labor force has shrunk by nearly one million people over the past two months, the WSJ continues. Obvious reasons include an acceleration in retirements or the tightening of U.S. immigration policies. However, many analysts believe that these factors cannot fully explain what is happening, the newspaper writes. The decline in the labor force has negative consequences for the economy, limiting its potential growth rate.

Judging by the market's reaction, the news of job cuts was viewed as positive by investors. The Nasdaq Composite Index rose nearly 1% during Friday's trading session, while the S&P 500 rose 0.5%.

The fact is that a weak labor market could prompt the Fed to postpone a rate hike, Bloomberg explains. Before the data was released, traders estimated the probability of a Fed rate hike by the end of the year at 85%; after the release, that figure dropped to 75%. A rate hike would be a negative factor for the stock market, making stocks less attractive.

But the Fed’s policy is not determined solely by the labor market. High inflation will most likely remain the Fed’s primary focus. It was precisely this that prompted three Fed officials to vote against keeping rates unchanged at the last meeting.

"If inflation turns out to be higher than expected in the coming months, the likelihood of a rate hike will increase," noted Nationwide Chief Economist Cathie Bostjancic in her note.

Today's report gave the market only a temporary respite, says Sima Sha, chief global strategist at Principal Asset Management. Next week, the U.S. will release data on consumer price inflation.

“Since Fed officials are giving virtually no clues about their next moves, inflation data are becoming even more important and could quickly reignite fears on Wall Street about another rate hike,” she noted.

This article was AI-translated and verified by a human editor