• The US gained 1.371 million jobs yet it was boosted by the government. 
  • Low participation continues masking higher unemployment. 
  • Misclassification pushes the unemployment rate higher. 

The headlines are impressive – a fall of the US unemployment rate to 8.4% and an increase of 1.371 million jobs, within expectations. The upbeat headlines have pushed stocks higher, allowing them to recover after Thursday's sell-off.

Follow all the NFP updates live

Looking under the hood, the data is not that great and the downside correction in equities could continue.

1) Temporary government jobs: Out of 1.371 million jobs, only 1.027 million were private-sector positions, below expectations. Looking at government jobs, no fewr than 238,000 are temporary census workers – who are scheduled to be laid off at the end of September. That is the first reality check.

2) Low participation: The headline unemployment rate has dropped to 8.4% from 10.2% in July – falling faster much earlier than projected. However, that figure is achieved when counting fewer people in the workforce. The participation rate is at 61.7%, still well the pre-crisis levels of around 63% and under 61.8% projected. 

3) Misclassification: Counting people who are out of work has become trickier in coronavirus times, amid government programs and rapid changes that make data collection more complicated than usual. The Bureau of Labor Statistics estimates that without these classification problems, the unemployment rate is around 9.1%. Moreover, the U-6 underemployment rate – which counts those too discouraged to look for a job and those unable to work fulltime – is still higher at 14.2%. 

Once markets realize that not all is rosy, they may turn down.

Stimulus implications

Moreover, the headline number may slow down fiscal stimulus talks – Republicans may now feel relieved and opt not to provide new stimulus. And that may add additional pressure to stocks.

The bounce from the peak of COVID-19 is hamstrung by the resurgence of the virus from mid-June. Consumers are shying away from going out and about and restrictions are also limiting activity. No less importantly, the economy was held up by vast government support – the multi-trillion CARES act

Most that relief lapsed at the end of July. That consisted of support to small businesses and a federal $600/week top-up to state unemployment insurance. The lack of this extra cash is hurting the broader economy.

Politicians have allowed the economy to fall over that "fiscal cliff" and markets are now coming to terms with the hard data. Stocks already tumbled on Thursday – a much-needed downside correction after a massive rally from March's bottom.

August's labor figures provide evidence of a recovery that is slowing down – job restoration is far from convincing. Over 10 million Americans are still out of work – and some are converting from temporarily jobless to long-term unemployed. 

Overall, the jobs report may trigger short term gains, but perhaps long term pain.

More What is behind the greenback comeback? Not only the NFP


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