Always Too Late: The Fed, Labor Data, and August Market Outlook
- Brad Tremitiere CIO
- Aug 13
- 7 min read
Always Too Late
With the massive downward revisions of both the May and June non-farm payroll numbers, sadly it once again appears that the Federal Reserve is once again late in adjusting their policy. After the out-of-place rate cuts last fall, the Fed has maintained the same narrative for most of 2025:
Expectations that economic activity will continue to moderate
Unemployment rate remains low
Labor conditions remain solid
Inflation remains somewhat elevated
Concerns that tariffs will fuel another inflation spike
Last Wednesday the Fed voted to maintain the current Fed policy rate of 4.25% to 4.50%, once again stressing the return of inflation as their biggest fear. Then came Friday and the largest monthly employment revisions seen in 50 years. These revisions basically wipe out one-third of all job growth in 2025.
Unemployment Data Issue
The biggest problem with unemployment data and the way that the Federal Reserve interprets it when voting on policy is that they mainly look at the unemployment rate and not the underlying growth of payrolls. For most of the last four years the US Unemployment Rate has averaged 3.90% per month and currently stands at 4.2%. Historically unemployment has averaged around 5.7%, so one could say historically the current rate remains well below average. But in all honesty the Unemployment Rate does not provide as accurate of a labor market indicator as the Fed would want you to believe for the following reasons:
Unemployment does not account for discouraged workers who have been looking for a job over the last 12 months but have now given up on finding a job.
Unemployment ignores marginal-attached workers that are not in the labor force because they have not looked for a job over the past month for various reasons.
Surprisingly unemployment does not separate between full-time and part-time workers.
There is no consideration given to underemployed people, which make up a large part of the workforce. These are workers who are forced to take lower paying jobs since they cannot find a job that matches their skill set.
The unemployment rate does not consider long-term unemployment—workers who have been out of work for at least 27 weeks. Incorporating the long-term unemployment rate would provide a better insight into the overall quality of the labor force.
The Unemployment Rate is not an accurate measure of the labor force since it does not consider everyone who doesn’t have a job, only those that respond to the monthly survey. Also, it does not consider job specifics such as job quality, discouraged workers, part-time and gig workers, and private vs. public sector jobs, which to us is the major reason the Fed has waited too long.
Government Hiring and Distorted Data
Starting in July of 2022, there was a massive increase in the number of monthly new government hires. Going back to 2010 and through June 2022 (not including 2020 numbers due to Covid), the government on averaged about 5,100 new hires each month. From July 2022 through the end of 2024, monthly government hires averaged a massive 45,433 or more than 800% increase over the long-term data.
In both 2023 and 2024, the government (Federal/State/Local) was responsible for the second largest percentage of job growth after healthcare. This massive bloating of the government payroll not only created a large tax drag on the economy, but it also skewed the monthly employment data to present a much healthier labor market, which has allowed the Fed to stay higher for longer. Now that government payrolls are being purged, we are starting to see the real condition of the US labor market.
What Should the Fed Do Now?
It would be in the Fed’s best interests to call an emergency meeting today and cut their policy rate by 75bps, moving from the current 4.25% - 4.50%, down to 3.50% - 3.75%. They could have done this at last week’s FOMC meeting and only cut 50bps, but given the nonfarm payroll revisions from Friday, the bond market has strengthened.
Data derived from Federal Reserve Bank of St Louis (www.fred.stlouis.com)
History shows that whenever the Fed rate is below the current yield on the 2 Year Treasury, Fed policy is too loose. And when the Fed rate is above the yield on the 2 Year Treasury its policy is too restrictive. As the chart shows below, the Fed was about nine months late in starting to raise rates in summer of 2021. Instead, they maintained their basically 0% policy and massive $125 billion in monthly stimulus while inflation started to spike significantly. It was not until March of 2022 that Fed began raising rates and terminated their quantitative easing program. We can all remember the pain caused by the Fed having to once again play catchup and raise rates at a record pace over the remaining months of 2022.
Finally in March of 2023, when the Regional Bank Crisis played out, the 2 Year Yield fell below the Fed rate. But instead of cutting rates to get back in line, the Fed raised rates another 3 times before their final 25 bps hike in July 2023. Even with the three rate cuts last fall, Fed policy has basically been too restrictive for the last 28 months, longer than any period over the last three decades.
As it becomes more evident that non-farm payroll growth has been at stall speed for much longer than the Unemployment Rate shows, the Fed is going to have to get extremely aggressive in cutting rates to help undo the damage caused by their misplaced policy over the last few years.
Strong May, Strong June, Strong July, Strong August?
Since 1970 there has been a total of thirteen months when the monthly returns for the S&P 500 have been positive for May, June, and July. Out of those thirteen months, the S&P has returned 1.29% on average in the month of August, with nine of those months producing positive gains. Only the Asian financial crisis in 1997 produced an August with a meaningful decline. Unless there is a major unknown out there, we would expect similar type of returns for August this year.
Usually when the market remains positive for the four months between May and August, the seasonal weakness is pushed out to later September and early October, so we will have to keep an eye on this moving forward.
Market Breadth Remains Strong
Since making a new all-time high in NYSE cumulative breadth on May 16, NYSE breadth has now made a total of nine new all-time highs over the 55 trading days. This is another great example of how breadth leads price, as it took the S&P 500 twenty-eight more trading days after the NYSE breadth high to also make a new all-time high. The new high in NYSE breadth just about guaranteed that the S&P 500 would eventually reach a new all-time high as well.
While NYSE breadth has remained strong since the April market lows, we must realize that this strength will not last forever and be ready to adjust when the environment changes. The best indicator to assist us in assuming when the market trend will change is a negative divergence between breadth and price. Again, as breadth made a new all-time high in May, it pulled the market higher. Problems occur when breadth declines, meaning there are more daily sellers than buyers, yet the market indices continue to move higher.
An example of the type of negative divergence we are looking for occurred over the second half of 2007, which was a great early warning signal that problems lay ahead.
On June 4, 2007, NYSE breadth reached a new all-time high with the S&P closing that day at 1,539.18. It took the S&P another ninety trading days to reach its final high, closing at 1,565.15 on October 9, 2007. Over those ninety trading days the S&P gained about 1.70%, while NYSE breadth contracted by more than -3.50%. As we all know, the next year and a half in the market was not very investor friendly. It was not until December 2009 before NYSE breadth made another new all-time high.
Data derived from E-Signal (www.esignal.com)
For now, we do not have much to worry about based on the strength we have seen over the last few months in breadth, but moving forward this will be an indicator that we will update often for clients.
August Outlook
“Sell in May and Go Away,” should be replaced by “Sell in August and come back in October,” it’s just not nearly as catchy, nor rhymes. But that is what the market has become the last few decades as August and September have become the two worst performing market months on average. Low trading volume, seasonal trends, policy concerns (Jackson Hole), and anticipation of September volatility are a few reasons why August has produced lackluster returns.
Based on the market performance leading into August as well as several other factors such as market breadth, leads us to believe that August should tilt slightly toward the bulls for the month. There are many issues that could still slant the market negative over the coming week, but as it is every August now, the market will respond from the signal it received from Jerome Powell’s speech at the annual Jackson Hole Economic Policy Symposium. The event is held August 21–23 and Powell should be presenting on the morning of Friday August 22.
Based on the revisions to nonfarm payrolls as well as more chatter by regional Fed presidents, we would assume Powell’s Jackson Hole speech would be much more dovish and signal a rate cut at the September FOMC meeting. But Powell has surprised the market a few times with his comments at the event. Most notably in 2022 he took a very hard stance on keeping interest rates higher for longer, reversing the market which was looking for more interest rate friendly comments. The S&P 500 dropped by -3.37% that Friday and continued to lose another -9.77%. Our assumptions are that Powell is much more dovish in his comments than his recent rhetoric.
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