Cracks Appear in the U.S. Economy as Jobs Growth Slows and Unemployment Rises

The U.S. is the world’s largest economy; however, cracks are beginning to appear. Typically, that would be bad news for the stock market, but right now, weak U.S. economic data is a positive for Wall Street. At least for the time being.

The U.S. economy added just 29,000 jobs in September—far less than the 133,000 jobs added in August, and far below calls for 90,000 jobs. The U.S. unemployment rate inched up higher than expected to 4.2%.

Average hourly earnings climbed just 0.1% on a monthly basis and 3% on an annual basis. That might sound like a positive, but it represents the smallest year-over-year gain since May 2021. The current U.S. inflation rate is also 3.4%, which means wages are not keeping up with inflation.

Normally, weak U.S. economic data would be bad news for Wall Street, especially when we’re less than a month out from U.S. midterm elections. But in this case, investors responded favourably by sending stocks to near their all-time high.

On Friday, October 2, the S&P 500 hit an intra-day high of 7754.67, that’s less than 0.1% below its August 13 record high of 7816.70. The Nasdaq, meanwhile, gained 2.1% and hit a record intra-day high of 27,353.68. The Dow Jones Industrial Average climbed 0.5%, while the TSX continues to outpace the S&P 500, rising 16.5% year over year.

Why Are Stocks at Record Levels?

Why did Wall Street respond favourably? The weak U.S. jobs market and rising unemployment rate suggest inflation will not climb significantly higher. Higher inflation would mean the U.S. Federal Reserve could be forced to hike interest rates when it meets again later this month to help cool the economy. But sentiment on Wall Street has cooled to that, with economists now saying there is just a 23% chance of an interest rate hike, compared with a 64% chance a week earlier.

Maintaining interest rates should be good news for the average American. And it couldn’t come at a better time. U.S. consumer confidence fell in September to 81.9, down from 88.6 in August, putting it at the lowest level in more than a decade. And that includes the pandemic.

A big part of that pessimism is coming from how business owners view the outlook for their own companies and individuals looking for work. While employers aren’t laying off workers, they aren’t hiring many either.

On the plus side, the U.S. economy remains resilient. This is despite global trade wars, stubbornly high inflation, higher interest rates, and a war in Iran that has fuelled energy prices.

The U.S. Commerce Department said the U.S. economy performed better than expected in the spring, with gross domestic product (GDP) growth estimates from the first quarter climbing to 2.5% from 2.1%. Second quarter GDP growth was also revised upward to 2.2% from 1.5%.

No matter what happens in the U.S. November mid-term elections, the outlook for the stock market remains bullish.

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