This week the US jobs report came out, and the headline everyone quoted was simple: unemployment in the US fell to 4.2%. Usually that's good news, a falling unemployment rate means more people are working. Except this time, if you read the report itself and not just the headline, you find the opposite picture. The US economy added just 57,000 jobs in June, when economists expected more than double that, around 115,000. The numbers for the previous months didn't stay as they were either: the US Bureau of Labor Statistics went back, checked the data again, and found that both April and May had added fewer jobs than it originally reported, so it revised those numbers downward. In other words, not only was June weak, but the past that had looked reasonable turned out, in hindsight, to be weaker than we thought.
So here's the contradiction you can't ignore: hiring was weak, the trend is cooling, and yet unemployment actually fell. How do those two things live in the same breath? The answer starts in a place most people have never stopped to think about, in the simple question of what the unemployment number even measures.
Picture a long line outside the unemployment office. In the city there are three kinds of people: those who already have a job, those standing in line looking for work, and those who gave up, stepped out of line, and went home. The official unemployment number, the one you hear on the news, looks only at the line. It takes the people in line without a job and divides them by everyone still "in the game," meaning the employed and the line-standers together. Here's the trick: whoever got up and went home simply vanishes from the math. They aren't counted as unemployed, because "unemployed" is defined as someone actively looking for work. The moment they stop looking, they disappear from the equation as if they were never there.
Now watch what that does. If one day a hundred people give up and leave the line, the line gets shorter. A shorter line looks like good news, as if the problem shrank. But not one of those hundred found a job. They just went home. The unemployment number dropped, not because things improved, but because people quit.
That is exactly what happened in June. The US labor market didn't grow, it shrank by 720,000 people. Almost three-quarters of a million left the workforce, meaning they stopped working and stopped looking for work all at once. The figure that captures this is called the labor force participation rate, and it's simply the share of adults who are working or looking for work. This month it fell to 61.5%, the lowest since March 2021. That's the real reason unemployment "fell": not because the line moved forward, but because a big part of it got up and left.
We can now return to another number, one I mentioned once before in Letter #08. Besides the official unemployment rate, there is a broader measure of unemployment, known in the jargon as U-6. If the official rate counts only those who have no job and are actively looking, U-6 tries to capture the people who fall between the chairs too: those working part-time only because they couldn't find full-time work, and those who have already given up the search but would gladly work if there were a job. It's a number that tries to show how many people are truly unsettled in the labor market, not just the official, narrow edge of it. This time even U-6 fell, to 7.9%. So maybe everything's fine after all? Not at all. Both numbers, the official one and the broad one, share the exact same blind spot: they only see who's still inside the labor market, working or at least looking. Whoever got up, gave up, and went home isn't counted by either. The only gauge that managed to capture what really happened this week is the participation rate, that same share of adults working or looking, and it sank to its lowest level in more than four years. It says exactly what the other two missed: people didn't find jobs, they simply stopped looking.
After a report that weak, weak on almost every measure, logic says the stock market should fall. In reality the exact opposite happened: the Dow and the Nasdaq, the two main US stock indices, actually rose that same day. It sounds illogical, until you understand what investors are really looking at. They weren't reacting to the state of the workers, they were reacting to what this report does to the Federal Reserve.
The Federal Reserve, or "the Fed" for short, is the central bank of the United States, the body that sets interest rates in the economy. That's the same rate that affects almost everything, from your monthly mortgage payment to whether investing in stocks is worthwhile. The Fed has one main tool: when the economy is running too hot and prices start climbing too fast, it raises rates to cool it down; when the economy weakens and loses speed, it lowers rates to encourage it. Now we can connect the dots. A weak jobs report is a sign the economy is cooling, and a cooling economy takes the pressure off the Fed to raise rates, and may even push it to cut them sooner than planned. But why does all of this move stocks in particular? For a few reasons that add up. First, when rates fall, loans get cheaper, and companies can raise money on the cheap, expand, and earn more. Second, the safe alternative to stocks, like a bank deposit or a government bond, becomes less rewarding when rates are low, so some of the big money flows out of the safe channels and into the stock market, lifting it. So in the investor's eyes, a bad jobs report is actually good news: it brings closer the rate cut the market has been longing for.
This is exactly the principle that repeats in the market again and again: in the short term, the market doesn't react to the economy itself, it reacts to what it thinks the Fed will do because of the economy. Those are two completely different things, and whoever confuses them will be surprised every time by why the market rises on a day of bad news, and falls on a day that looks good on its face.
What does this mean for your pocket?
So what does all of this mean for your pocket? First, and it doesn't matter whether you're reading this from New York or Tel Aviv, the first lesson is to read an economic headline carefully. The next time you hear "unemployment fell," don't stop at the headline. Ask why it fell, because as we saw, the very same number can be published both when things are genuinely improving and when people simply give up and stop looking, two completely opposite situations. Whoever reads only the headline may get exactly the reverse of reality, and feel secure precisely when caution is called for.
And this point touches Israelis too, not only Americans, and far more people than it seems. Even an Israeli who has never bought a single American stock usually holds a sizable slice of the US market, through a pension fund, an advanced-study fund, or a fund tracking the index of the 500 largest US companies. What happens to US interest rates ends up moving Israeli savings too, and the shekel-dollar exchange rate as well. This week you saw that mechanism live: a bad economic report lifted the market, not because the economy is strong but because investors priced in lower rates ahead. The one mistake really worth avoiding is to get confused and think stocks rose because the economy is healthy. They rose thanks to the Fed, not thanks to the job market, and that's a difference that can cost money for anyone who misses it and bets on the economy instead of on the rate.
One component remains that will decide where all of this goes, and it sits with the man running the Fed. The US central bank has, in effect, two goals that pull in opposite directions: on one hand to keep inflation low and stable, meaning prices that don't climb too fast, and on the other hand to keep employment high, meaning people working. In normal times you can balance the two, but sometimes they collide, and that's exactly the situation now. The new Fed chair, Kevin Warsh, said plainly this week that his priority is bringing inflation down to the 2% target he's aiming for, and not employment. The implication is troubling: as long as inflation is high, Warsh can afford to ignore a job market that's quietly weakening, and not rush to cut rates to help it. So the next important number to wait for isn't another jobs report, it's the consumer price index, the measure that tracks the pace of price rises in the stores. If it comes down, the Fed's hand is freed and it can finally start paying attention to the widening cracks in the labor market. If it stays high, Warsh will keep looking in just one direction, and the job market will have to fend for itself.
We shall see.
See you in next week's letter, or sometime during the week, if I can't hold back until then...