Capital markets perspective: Half full or half empty?

Capital markets perspective: Half full or half empty?


There are at least two ways to estimate how many Americans are gainfully employed: You can ask businesses how many people are on their payrolls, or you can ask Americans themselves. Each month, the Bureau of Labor Statistics (BLS) does exactly that with an “establishment survey” that asks businesses and government entities how many people they write paychecks to each month, and a “household survey” that asks US residents if they have a job or are planning to get one.  

The results are then rolled up together and released early each month as the “employment situation summary” – easily one of the most impactful economic releases on every investor’s calendar. Because these two surveys measure slightly different things, they often differ in the details. But for the most part, they usually align pretty closely, at least directionally. 

Now, however, they seem to be reaching different conclusions: The establishment survey showed a net gain of 206,000 new jobs in June. That’s a pretty good result that in some ways represents the best of both worlds: positive job creation, but at a cooler, more sustainable pace.

Markets generally reacted kindly to Friday’s release: Stocks were mostly higher (large caps, at least,) and bond yields dropped notably after Friday’s report. This was almost certainly because the payrolls data derived from the establishment survey suggests growth is neither too hot to attract unwanted attention from the Fed, nor so cold that it risks satisfying the definition of recession.1

But the household survey wasn’t quite as upbeat: The survey showed the unemployment rate ticked up 0.1% to 4.1%, its highest rate since November 2021. Moreover, the household survey also suggested that those who lose their jobs are staying unemployed longer. If the household survey is correct, then the economy might be closer to recession than the establishment survey suggests.

Again, these surveys measure different things and the data they yield is therefore not directly compatible. But something interesting happens when you instead compare insights drawn from both sources independently against themselves, across time. Using December 2019 as a base, non-farm payrolls – the headline figure from the establishment survey – flies in a nice, smooth arc up and to the right, a pretty picture that succinctly captures the powerful post-COVID recovery in jobs.

On the other hand, the number of U.S. residents who answered “yes” when the BLS’ household survey asked them if they are employed has followed a far more erratic flight pattern. At first, it followed the establishment survey’s nice smooth arc. But more recently, its trajectory has stalled out. That, suffice to say, is very much at odds with a soft landing for the U.S. economy. 

Why does this matter? Because it’s hard to imagine something more central to the economic narrative right now than jobs: If the job market has indeed hit stall speed like the household survey suggests, then the U.S. may finally get the recession that many of us thought was bound to arrive last year. But if the establishment survey is the better read, then the market’s recent optimism might be justified, at least for now.

As before, the secondary data on last week’s economic calendar did little to clear up the confusion. Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report showed that the number of job openings recovered a little bit in May after a big miss in April.2 Moreover, the number of layoffs reported by Challenger, Gray and Christmas eased month-over-month even while staying elevated on a year-over-year basis.3 But ADP’s estimate of job creation was far less optimistic than the BLS, hinting strongly that gains were skewed heavily toward a recovery in hiring in the leisure and hospitality sector.4

And then there were Tuesday’s manufacturing Purchasing Managers Indices (PMI) – one version from S&P Global and another from the Institute of Supply Management – which didn’t exactly agree with one another. S&P’s version suggested that growth in the manufacturing sector continued while input prices surged, while the Institute for Supply Management’s (ISM’s) version suggested more or less the opposite.5,6 The services sector versions of both releases were spoiled by similar disagreements when that data hit the wires on Wednesday, with the S&P version touting a big increase in new order activity while the ISM’s read saw a big deterioration.7,8

What to watch this week

This week’s main event will be Thursday’s release of the consumer price index (CPI) for June, followed a day later by the release of the producer price index (PPI) on Friday. With luck, we’ll see a continued easing in both, which could finally give the Fed enough confidence to begin cutting rates before the labor market tips over unambiguously. 

Of course, the exact timing of any expected future rate cuts is something that Fed Chairman Jerome Powell will almost certainly be asked about when he travels to Capitol Hill on Tuesday to brief the Senate Banking Committee for round one of his Semiannual Monetary Policy report. This twice-yearly tradition is worth paying attention to, simply because the Fed’s next move is almost certain to generate a reaction by financial markets when it finally comes.

Friday will mark the unofficial start to second quarter earnings season when a group of big banks announce results. As always, banks are uniquely qualified to opine on the economy given that they post up at the virtual crossroads of the global economy, poised exactly between the fundamental and the financial. Just like last quarter, things to watch include write-offs and loan loss provisions – elements of bank earnings that provide a unique, direct and up-to-date view of how the nation’s borrowing public is holding up amid the uncertainty. Also of relevance will be anything that suggests banks are becoming either more- or less willing to extend credit to would-be borrowers– lending standards remain recession-tight even in the absence of actual recession. 

Two sentiment surveys should also be on your radar this week: The National Federation of Independent Business’ (NFIB’s) Small Business Optimism Index (Tuesday) and the University of Michigan’s mid-month update of its Consumer Sentiment Index (Friday.) While they come at the question from different angles, both surveys can provide important insight into the nation’s collective psyche. From a business perspective, small businesses are having a much harder time coping with high rates and a cooling economy than large ones, while from a consumer standpoint, lower-income consumers felt the pinch sooner and harder than higher-income consumers. But the longer rates stay high, and inflation remains a threat, that angst will continue to move up-market. That makes both surveys required reading for anyone interested in the direction of capital markets and the economy for the foreseeable future.

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1 Bureau of Labor Statistics, "Employment situation summary," June 2024.

2 Bureau of Labor Statistics, "JOLTs," June 2024.

3 Challenger, Gray, and Christmas, Inc. "Job Cuts Tumble in June 2024, Led by Consumer Manufacturing; Second-Highest Hiring of the Year," July 2024.

4 ADP, "ADP National Employment Report," June 2024.

5 J.P. Morgan, "J.P.Morgan Global Manufacturing PMI®," July 2024.

6 ISM, "Manufacturing PMI," June 2024.

7 S&P Global, "S&P Global US Services PMI®," July 2024.

8 ISM, "Services PMI," June 2024.


Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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