Monthly Economic and Market Summary

• Broad Equity Gains Mask Small Cap Weakness – The S&P 500 advanced 2.72% in August, supported by robust corporate earnings and continued AI-related investments. While the S&P 500 posted solid gains, mid-cap stocks were only slightly positive, rising 0.15%, while small-cap stocks declined 0.60%. International markets also advanced, led by emerging markets, as the MSCI Emerging Markets Index gained 3.39%. Bonds were slightly positive returning 0.20% as measured by the Barclay’s Intermediate Govt’t/Credit Index.

• S&P 500 Earnings Remain Robust – S&P 500 earnings rose 53% year over year in Q2 on nearly 16% sales growth, with about two companies raising guidance for every one cutting it. Strength is being driven by AI-investment, resilient consumer spending and temporary tariff refunds.

• Warsh Strikes a Hawkish Tone - Federal Reserve (Fed) Chairman Kevin Warsh suggested financial conditions may not be sufficiently restrictive and that recent inflation data has not yet demonstrated a convincing declining trend. In response to the more hawkish tone, markets increased the probability of a September rate hike, though the Fed’s decision will likely depend on upcoming inflation data and persistent pressures from tariffs, geopolitics, strong economic growth and AI-related investment.

• Bessent Moves to Lower Long-Term Yields – U.S. Treasury Secretary Scott Bessent is expanding the purchases of longer-dated Treasuries to push down long-term yields and reduce government borrowing costs, arguing that yields are too high relative to economic fundamentals. The move raises concerns that the Treasury Department is influencing financial conditions at the same time the Federal Reserve is considering tighter policy to bring down inflation.

• Trade Tensions Continue – U.S. and Canada trade tensions remain elevated, with both sides imposing tariffs on roughly $20 billion of each other’s goods and little indication that negotiations will resume in the near term. The current tariff impact is expected to have a modest near-term economic effect. However, further escalation, particularly in the auto and auto parts sectors, could weigh on business confidence.

Looking Beyond Payrolls

Of all the economic data available, employment metrics have always been a key area of insight into the health of the U.S. economy. Every month, various data providers including the Bureau of Labor Statistics release numbers on the prior month’s employment. To look at the recent data, one would believe that the U.S. labor market is sound and resilient. Yet, as shown in the chart below, payroll estimates have increasingly missed the mark in recent years. After all, how could the unemployment rate retreat to 4.1%, but July non-farm payrolls show a loss of 23,000 jobs?

A recent Barron’s article took a deeper dive into labor market data, highlighting changing demographics and a shifting composition in the U.S. workforce. With elevated equity markets and, thus, retirement account balances at record levels, more older Americans are feeling financially secure enough to exit the workforce. At the same time, a slowdown in immigration may further reduce the growth of the working-age population. These demographic changes matter as they affect the supply of available workers. In an economy where labor force growth is slowing, fewer new jobs are needed to maintain a stable unemployment rate.

One thing is for certain: forecasting monthly job numbers will continue to become more challenging. Employment data are increasingly influenced by not only hiring trends, but also by demographic forces such as aging, retirement patterns and migration flows. Monthly surveys can capture the general direction of the labor market, but understanding the changes in the size and composition of the labor force will be essential to interpreting the full story behind the numbers.

Missing the Mark?

Declining response rates to the Bureau of Labor Statistics establishment survey and changing demographics are making it more challenging to predict employment trends.