Lies, Damned Lies, And Statistics
Well, last week’s jobs report cast a dark cloud over all those individuals who have been boasting about the strength of the U.S. economy. There are a lot of threads to pull on when deciphering this report, and it's not just this report, but the integrity of the data that is raising the biggest question. Before getting into it, let me make a humble request that we all put our political bias aside and attempt to be dispassionately objective in evaluating the situation. I have no doubt that no matter what I write and/or how I deliver it, it will elicit a reaction from one or both sides, but that won’t stop this humble analyst from trying to provide some useful perspective.
Let's start with some data, where we learned on Friday that the U.S. economy created 73k jobs and the unemployment rate ticked up to 4.2% from 4.1%. On the surface, nothing too surprising with the headline prints, however, when you start digging under the hood, things look much less constructive in the labor market. For starters, if you exclude jobs added from education and healthcare (two non-cyclical segments of the economy), job growth actually contracted in July – not that those aren’t real jobs or that they don’t create real income. However, the big story was the 258k downward revision to payrolls in the prior two months. These downward revisions to previous jobs reports have been a nagging problem for the BLS since COVID. So, it’s not a new development, but it is making it challenging to accurately gauge the health of the U.S. labor market in real-time.
Below is a comparison of how many jobs were created on the initial release of the data vs. what they have been subsequently revised to:
January initial report: +143k jobs revised to +111k
February initial report: +151k jobs revised to +102k
March initial report: +228k jobs revised to +120k
April initial report: +117k jobs revised to +158k
May initial report: +139k jobs revised to +19k
June initial report: +147k jobs revised to +14k
These are dramatic revisions where the initial prints for the first six months of the year tally 925k jobs created vs. the revised data showing 524k jobs created. Look, my interest in focusing on this situation isn’t to call into question the political leaning of the BLS department – as far as I know, these are hard-working civil servants doing the best they can with the tools they have. But there is a problem here that needs to be corrected. So, while I find myself arriving at a similar outcome as the President, we are coming from very different perspectives. I agree that this level of inaccuracy is a problem, has been going on for too long, and we are all accountable for our actions. Still, I do not think the error results from political motivations.
President Trump didn’t have an issue celebrating the prior jobs reports when they were initially reported – issuing the following White House release after the April jobs report:
And then this White House release following the June jobs report:
Don’t be shocked by politicians using propaganda to promote their bias or demean their adversaries. It’s been happening for centuries and is carried out worldwide; it's just more obvious in this era of social media and information overload.
Please, don’t twist the intent of the message in this missive. It’s not to call out the President – he is who he is, just as I am who I am – but rather to illustrate that “garbage in is garbage out”. Government data is some of the most critical and extensive reports we receive to evaluate the pulse of the U.S. economy, where significant and persistent revisions invalidate conclusions we previously thought were accurate. Many talking heads who have been boisterous about the strength of the U.S. economy and labor market got served a healthy dose of humble pie over the last several weeks. Prior to this jobs report, we got Q2 GDP that on the surface was strong with a +3.0% handle, but like the jobs report, a look below the hood showed an economy that is slowing towards stagnation. GDP growth for the first half of 2025 is a little over +1%. That’s nearly 1% below potential and not where we want it to be.
Now, before extrapolating too far down the imminent recession path (and don’t get me wrong, the pace of job growth is concerning), you have to keep in mind the impact the Liberation Day announcement had on activity. Not only did the level of the initial tariff announcements put businesses on their heels, but the reaction from markets (stocks plunged, yields spiked) reinforced a backdrop where it was best to just pause and do nothing until the cloud of uncertainty cleared. Within days of Liberation Day, Trump backed off his aggressive initial tariff volley, and the backdrop calmed. It didn’t clear up, but it did give decision makers a reference point to work off of. This is what was playing out over Q2, and therefore, to me, it makes sense to see economic data indicative of stagnation over this measurement period. For now, I think both the bears and bulls holding convicted views are misplaced and unbalanced.
Going forward, we should see the impacts of the policy changes (tariffs, One Big Beautiful Bill, Fed governor appointments, etc...) more clearly. Our work suggests that we should see an uptick in growth and employment, with tariffs hurting consumption while incentivizing (along with regulatory and fiscal policy changes) investment. For instance, an interesting detail in June’s jobs report was a revival in job growth for the native-born labor force as they return to the workforce to compete for jobs. Sure, you can send me a note calling me out as an anti-globalist and anti-immigration – not accurate, but fair given the message from this data point.
What I take away from this little tidbit buried in the details of the report is a subtle pivot towards labor taking share from capital after five decades of the reverse, where consumption growth was facilitated by debt accumulation, and capital mobility facilitated by deregulation drove higher return on invested capital. We’ll have to see if this trend continues, but it is a constructive development given the negative impact this administration's immigration policy is having on the labor market. Labor supply has cratered due to immigration restrictions with the foreign-born labor force down 802k since April. This indicates that the U.S. labor market is in a state of transition (also complicating the interpretation of the data) where labor demand has weakened, but that has not corresponded with an increase in labor slack which is why the unemployment rate has remained low.
Which brings me to the Fed and the conundrum Chair Powell finds himself in. He’s already in the hot seat, and last week's job report didn’t help his claim that the economy and labor markets are strong. Not to mention the tricky spot of the Fed continuing to miss on bringing inflation down to its 2% target (it has been above that for nearly 4 ½ years), while arguably meeting its employment mandate. Adding fuel to the fire is the surprise announcement by Fed Governor Adriana Kugler that she is resigning immediately – six months before her term was set to end in January. This will allow Trump to nominate another Fed governor, one that many will likely look to as a chairman in waiting.
Solid arguments can be made for a rate cut or the Fed holding the line, and investors will have two more CPI prints and one more jobs report to calibrate their views prior to the September meeting. In addition to incoming data, the decision at the September FOMC meeting will depend on the committee's willingness to lean into the idea that the weakness in payrolls has been driven by labor supply. At the July presser, Chair Powell suggested that even zero payroll growth wouldn't concern him as long as the unemployment rate remained stable. Now that view is being put to the test. Meanwhile, the latest tariff announcements pose further upside risks to inflation.
As for the equity markets, we just got through the busiest week of Q2 earning season with 330 S&P 500 companies having reported earnings growth that is tracking +9% year-over-year (versus +13% in Q1). Excluding Tesla (which missed) and Nvidia (which has yet to report), all the other Mag7 stocks beat on both EPS and revenues. Despite mostly positive results, there was some bifurcation with Amazon dropping 8% on disappointing AWS results, but Meta ripping +10% after posting much stronger than expected revenue growth. Cloud computing and AI are fueling the remarkable growth of U.S. technology giants. Meta alone is projecting around $70 billion in AI-related capex for the year. It came as a shock to me when I learned last week that so far this year, AI capex has added more to GDP growth than consumer spending.
These Tech giants continue to show resilience against macroeconomic fluctuations and policy uncertainty. Speaking of AI, the WSJ ran a story last week that resonated with me (AI Is Wrecking an Already Fragile Job Market for College Graduates), highlighting a darker side to the technology in terms of its impact on society and the overall economy via its negative effects on the entry-level job market (which will have ramifications for the trajectory of their careers and earnings potential). Big-cap Tech dominating everything doesn’t stop there. Remember the broadening out narrative being promoted by a lot of talking heads coming into the year, where this was the year for small-cap and the 490 companies outside the top 10. Yeah, right…economic growth was going to be broadening out and the forgotten 490 were going to close the gap. Not happening. The FT put out the below chart showing the degree to which earnings growth for the 10 biggest companies in the S&P 500 have trounced the 490 over the past 2 ½ years.
No doubt this validates their superiority from an investment standpoint, and confirms that all investors should have some exposure to the group, but I’d be lying if I didn’t share my fear that too much of a good thing is bad. The latest milestone to be reached by a member of this group, Nvidia, is that it now represents 8.1% of the S&P 500. That is a larger weighting than five entire sectors and is getting close to the weighting of the Industrials sector (8.6%). I found the below cartoon to be quite fitting for the times, but not sure who created it, so as to give them proper credit.
Rounding out my thoughts for this week’s missive. I must admit my surprise to see the equity market recouping almost all of Friday’s sell-off following the jobs report. But I guess the joke's on me for thinking that a soft jobs report that introduces some recessionary concern would rile the ‘buy the dip’ strategy that has paid dividends time and again, going back fifteen years now. I remain tactically cautious that the backdrop is ripe for a 5-10% correction in the equity market over the next couple of months. But I can’t say this view has caused me to materially alter how we're allocating client capital – still like high-quality compounders, themes in the nuclear, AI, robotics, electrical grid, and infrastructure space. At the margin, my tactical view is restraining me from putting money to work in anticipation of being presented with better entry points. If such a view ends up being too cute for its own good, so be it, we’ll continue to adapt and evolve with each passing day.
I also think global equity markets deserve some consideration, with the rest of the world stepping on the monetary and fiscal accelerator. China is back to supporting both its markets and economic growth, not like it did a decade ago, but it’s taken its foot off the structural rebalancing brake they were applying since 2020. Europe is seeking to be a beneficiary of the U.S. shifting gears on the global trade front, and emerging markets as a group stand to benefit from global growth accelerating and a structurally weaker dollar.
As for interest rates and the bond market, I think the 10-year Treasury yield around 4.25% is fairly valued, and as such presents a reasonable risk/reward in other segments of the bond market (high-quality CLOs, low-investment grade corporate credit, mortgages, and emerging market sovereign debt). Within the Treasury market, I prefer the 2- to 5-year maturity spectrum and remain uninterested in going out any further on the maturity curve. Moreover, I’ll continue to gladly collect risk-free interest on high-yielding money markets and short-term paper at 4.0%.
We also continue to take comfort in having a meaningful allocation to gold, which has been consolidating around the $3,300/oz level since April. A drop below $3,000/oz is possible, and if it were to occur, we’d use it as an opportunity to add. Additionally, we like the value in gold and copper miners at the current time – copper had one of its worst days on record last week when the administration exempted refined copper from 50% tariffs, which we used as an opportunity to add to the sector. As for Bitcoin, we remain holders for diversification and currency debasement purposes. We have no exposure or interest in other areas of the crypto space, and if Bitcoin corrects down to the $100k level, we would consider adding to our exposure.
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