Fade the Weak Jobs Data
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Recent economic data has been mixed. Manufacturing PMI was weak, but Services PMI was strong. More importantly, the trifecta of employment data was weak, including job openings, unemployment claims, and payrolls.
Markets reacted negatively to the prints. While bad data ought to be welcomed because it secures more Fed rate cuts, if the data is too bad then it can trigger a recession. And of course, good data spark inflation fears and could prompt the Fed to pivot back to being on hold. So you can see the economy needs to walk a fine line in order to please investors. It also doesn’t help that Fed members have been divided on interest rate policy.
The Fed Beige Book, which is an amalgamation of economic conditions across 12 districts of the US, was also released this week. Unfortunately, it too reported mixed activity with modest growth, stable employment, and inflation pressures mounting. Consumer spending was cautious due to price-sensitive and selective behavior, despite consistent wage growth. To wit:
Across Districts, contacts reported flat to declining consumer spending because, for many households, wages were failing to keep up with rising prices… New York reported that “consumers were being squeezed by rising costs of insurance, utilities, and other expenses.”
Eleven Districts described little or no net change in overall employment levels, while one District described a modest decline. Seven Districts noted that firms were hesitant to hire workers because of weaker demand or uncertainty. Moreover, contacts in two Districts reported an increase in layoffs, while contacts in multiple Districts reported reducing headcounts through attrition.
-August 2025 Fed Beige Book
So the question is, are we seeing a growth collapse that indicates an imminent recession? Our view is no, and here’s why…
Economic Surprise!
We take the contrarian view that the US economy is still fine, and therefore, stocks can remain supported. The key insight here is consumer spending is still expanding; it has increased every quarter (chart below). To the tune of about 2-3% more spending every year.
The labor market and consumer spending are two sides of the same coin. Logically, people only spend money when they have jobs. Furthermore, every dollar spent is someone else’s income. If I spend money at the grocery store or movie theatre, someone there gets paid; they in turn take that money and spend it elsewhere. In this way, money in the economy is constantly flowing circularly. This picture does not look like we are barreling towards recession.
The GDPNow forecast, which is a leading estimate of current GDP growth, saw a sharp acceleration to 3.5% (green line, below). As long as growth is sustained in the broader economy, that should be a tailwind for stocks. Strong growth also supports our thesis that the US economy is early in a new cycle, but we’ll need more evidence to confirm.
We are entering a seasonally strong period for econ data. In the past 15 years, the economy has tended to surprise positively in Q4 of the year, as circled below. This has to do with the run-up to major holidays, year-end inventory restocking, and an uptick in hiring to meet annual targets. Therefore, there will be a natural tailwind to help the broadening of the tech rally to cyclical sectors.
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