The recent jobs report showing a softer-than-expected labor market has sent global markets into a frenzy, with stocks tumbling on Friday and Monday. However, Northeastern University labor economist Alicia Modestino believes that the market’s reaction may be an overreaction to the report.
Modestino points out that while the jobs report was a miss, it wasn’t a significant one. She notes that predicting trends in the labor market can be challenging, especially during periods of economic slowdown. Additionally, she highlights that July was a month filled with political and environmental uncertainties, which may have impacted hiring decisions.
Despite the overall miss in job creation, Modestino identifies some bright spots in the report. Labor force participation and average hourly earnings increased, and there was growth in sectors like healthcare, construction, and transportation. These positive indicators suggest that the economy is still expanding, albeit at a slower pace.
The sell-off in the markets following the jobs report can be attributed to several factors, according to Modestino. One key factor is a likely bubble in the tech market, particularly around artificial intelligence. Information jobs saw a decline, leading investors to pull out of AI-related stocks like Nvidia, Apple, and Tesla.
Another concern is carry trades, where investors borrow in low-interest rate currencies and invest in higher-interest rate currencies. With the Federal Reserve likely to cut interest rates in September, investors may be looking to exit these trades to avoid potential losses.
Lastly, Modestino suggests that investors may be signaling to the Fed that a rate cut is necessary to support the softening labor market. By selling off stocks, investors are sending a message that they expect the Fed to act swiftly to prevent further economic downturn.
Overall, Modestino’s analysis provides a nuanced perspective on the recent market turmoil in response to the jobs report. While the report may have been a miss, there are still positive indicators in the economy that suggest resilience and growth. Investors will be closely watching for further developments and potential policy changes from the Federal Reserve in the coming months.