Bad economic news might actually be bad again

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The August jobs report on Friday morning confirmed what the market had expected after July’s slowing job growth and prior months’ revisions: The labor market’s Cal Ripken-esque run of indefatigability has ended.

The data revealed the economy added 22,000 jobs in August, weaker than the 75,000 economists expected, and the unemployment rate rose from 4.2% to 4.3%.

Revisions to earlier data also showed the labor market was weaker than previously thought. Job growth for June was revised into negative territory to -13,000 jobs, while July showed below-trend growth compared with the past year, marking three months of slowing job growth.

Certainly enough to show a trend.

Given the likelihood of a Fed cut was already at the high 90% level, the weak jobs report had little positive impact on the market — a zag from what we’d grown accustomed to seeing.

Since the post-COVID inflation spike and rate hikes, investors have been keen for reasons to cut. And given that inflation has consistently resisted being tamed, investors have hoped for some labor market cooling to force the Fed to finally lower rates.

That’s where the rationale behind “bad news is good news” comes from. Job losses, stalled careers, and businesses hiring fewer people may not be great news for individuals and households.

But a diminished labor market means that central bankers would step in to figuratively save the day, juicing the economy to reignite growth and make it cheaper for companies and people to borrow money.

Except, investors were already expecting the Fed to cut rates at the September meeting. The Fed’s rescue was already “priced in,” so to speak. And while weak jobs figures now make a rate cut all but certain — and have increased the likelihood of back-to-back cuts in October and December — investors are also contemplating the risks of a downturn.

And now, when it comes to jobs reports and other macroeconomic readings, bad news may once again look like bad news.

From here on out, the economy will tread a fine line, with investors pining for a goldilocks scenario where the economy is good enough to keep up the growth but bad enough to keep the cuts coming.

It’s hard to deny the stock market loves rate cuts. But why those cuts are needed in the first place is also important. Wall Street’s gains are fundamentally about earnings. And positive earnings are harder to come by when the economy is struggling.