Low Nonfarm Payroll Number? Don't Blame Demographic Shifts Only

 |  Includes: DIA, SPY
by: Nick Chiu

The nonfarm payroll number is a statistic report issued by the U.S. Bureau of Labor Statistics, which accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll number is reported on the first Friday of each month and is mainly used to help government policy makers and economists determine the current state of the economy, as well as predict future levels of economic activity.

Low Nonfarm Payroll Number for March 2013

On April 5, 2013, as reported by the U.S. Bureau of Labor Statistics, the nonfarm payroll employment edged up in March (+88,000), and the unemployment rate was little changed at 7.6%. The market was disappointed with the nonfarm payroll number. However, Alan Krueger, chairman of White House Council of Economic Advisors, said that 500,000 people leaving the job hunt was happening because of demographic shifts:

The labor force participation rate peaked in 2000 because of demographics. We are getting older as a nation. Its an issue we face.

Demographics Shifts

The U.S. is indeed facing the problem of demographic shifts. Investors should be aware that the percentage of the population age 65 and older is expected to increase from 15% in 2015 to 19% in 2025 for the United States. The aging trend will continue and will only start to stabilize in 2040, as noted in my last article titled "Aging Population And Growing Demand For Low-PEG Stocks."

Is the S&P Index No Longer In Sync With the Nonfarm Payroll Number?

However, is it only the aging population that is causing the low nonfarm payroll number or the economy is not recovering as well as the market is indicating? After so many rounds of QE, it is almost impossible that the market is not affected by the flood of new money into the system. By looking at the charts below, you can see a strong correlation between the nonfarm payroll number and the S&P 500 since 1990.

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Source: Tradingeconomics.com and Bureau of Labor Statistics.

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Source: Google Finance.

The S&P peaked in 2000 and then followed by a dramatic decline in 2001 and 2002. The S&P peaked again in 2007, which was then followed by a serious decline in 2008 before it started to rebound in 2009. The nonfarm payroll number declined continuously since 2000 before it rebounded in 2002. Furthermore, the nonfarm payroll number started to crush down since late 2007 before it started to recover in 2009. However, the correlation disappeared since early 2012, as seen in the charts below where the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) are compared to the U.S. nonfarm payroll number.

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Source: YCharts.com.

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Source: YCharts.com.

Both SPY and DIA started to diverge with the nonfarm payroll number. As of the last report, both SPY and DIA are strongly diverging away from the low nonfarm payroll number of 88,000. If the divergence continues and the nonfarm payroll number continues to decline, then investors have to seriously considering the after-party effect once the Fed starts to tighten the policy. Things could get even uglier when the fear kicks in. The key takeaway is to monitor this nonfarm payroll number carefully and take necessary precaution if it continues to deteriorate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.