A Look at the March Jobs Report:
Non-farm Payroll Employment: + 120,000
The Unemployment Rate: 8.2%
(Click to enlarge images)
Note: Notice the vast variance between the official U-3 number the U-6 number.
What Are The Implications?
A strong jobs number is typically bullish for the stock market, since more jobs and longer work weeks indicate higher future consumption, which is the backbone of the U.S. economy. Higher spending translates into higher profits for companies. The general exception is when market participants worry about high inflation when the economy is already at, or near, full capacity. More jobs in an overheated economy can lead to inflation, higher borrowing costs for businesses, and cause the Fed to increase interest rates, which will lead to a slowdown in the economy.
When the economy is in full-swing a strong jobs report can cause bond prices to decline sharply, because it is an indicator of possible inflation, or interest rate increases by the Fed. The size of the reaction often depends on where the economy is in the business cycle. The closer the economy is to full output, the worse a strong jobs number can hurt bond prices. A weak jobs number can indicate a slowing economy, which is bullish for bond prices (lower bond yields due to the inverse relationship between price and yield).
If the economy is near the peak of the business cycle a strong jobs number can be very bullish for the U.S. dollar, since there is a higher probability of interest rate increases in the near future, which makes the dollar more attractive to foreign investors because they will be able to earn higher interest on treasuries. A poor jobs report means the Fed is unlikely to raise rates in the near term, and can put downward pressure on interest rates, making the U.S. dollar a less attractive investment, and causing a sell-off.
How to Use The Unemployment Report to Become A Better Investor:
Table B provides the employment changes by industry to help investors determine industries of strength and weakness. Many jobs are being lost in retail, which is not surprising with companies like Best Buy (BBY) and Sears (SHLD) announcing layoffs and store closings while they try to compete with online retailers like Amazon (AMZN). The key is to look for multi-month trends (ideally three months).
Table B-1 provides more insight into the economy's future prospects. Companies often hire temporary employees before they spend the extra money and time training full-time employees. The table shows temporary payrolls decreased from February to March.
Table B-2 shows average weekly hours and overtime by industry. Consistent trends in the hours worked per week can provide a good indication if hiring or layoffs are likely to pick up (manufacturing being the most sensitive to the economy). This table provides valuable insight into which industries are the strongest/weakest in the economy. Again, we get confirmation that retail is slowing down.
Table B-3 gives us an insight into the average hourly and weekly earnings by industry.
Table A has abundant data on the labor force. Line two highlights that although the non-farms payroll reported an increase in 120K jobs between February and March, the civilian labor force shrank by 164K during the same period, due to the fact that the labor force only counts people actively seeking work. This indicates that an increasing number of unemployed workers have given up trying to look for work. Adjusting for the 164K people who are no longer counted in the labor force would actually result in a loss of 44K jobs. Compounding this problem is the fact that during the same period the civilian non-institutional population increased by 169K jobs, so although the population increased by 169K people the civilian labor force actually shrank by 164K. The resulting effect is a labor participation rate of only 63.8%, the lowest since 1983.
Another good measurement to follow is the number of people unemployed for less than five weeks. An increase in this number indicates companies have recently increased layoffs. Changes in the average duration of unemployment should be monitored to help investors get a better understanding of the long-term trend of the duration of unemployed workers.
Labor Participation Rate:
Small businesses are typically the first to hire and layoff employees. Consistent trends in small business activity can serve as a leading indicator as to where future employment is heading.
Criticisms Of The Unemployment Report:
- The official U-3 unemployment rate does not count marginally attached workers (including discouraged workers) as unemployed. Marginally attached workers are defined as a people who are eligible for employment and are able to work, but are currently unemployed and have not attempted to find employment in the last four weeks.
- People employed part-time for economic reasons are excluded from the official U-3 unemployment rate.
- Many believe even the marginally attached workers figure is understated, due to the fact that long-term discouraged workers were removed from the calculation in 1994. Long-term discouraged workers are defined as workers who are eligible for employment and are able to work, but are currently unemployed and have not attempted to find employment in the last year. Even by using the most liberal definition of the unemployment rate published (the U-6) long-term discouraged workers are not being counted.
- The seasonal adjustment factor can cause large swings in the workers counted in the non-farm payroll number. It is important to compare Table B-1 not seasonally adjusted vs. seasonally adjusted to understand how much of an effect seasonality had on the payroll number.
- Employment adjustments from new businesses (Net Birth/Death Adjustment) are estimated using an econometric model, which is often inaccurate at business cycle inflection points, and tends to overstate the number of jobs created.
- It is evident that many workers have fallen out of the civilian labor force as can be seen when comparing the declining labor participation rate in Table A to historic averages.
The jobs report is the most important economic data point, and it is closely followed by the market. A strong understanding of the jobs report gives investors a better understanding of where the economy is in the business cycle, and gives insightful information on industries of strength and weakness in the economy. All serious investors following the broad market like the SPDR S&P 500 ETF (SPY) should have at least a basic understanding of not just the headline numbers, but how to interpret the numbers everyone hears on CNBC.
Since the Fed has a dual mandate of stable prices and maximum employment, they are analyzing the numbers closely. The ability to understand what the numbers are really saying can be used to help anticipate future Fed action (e.g. interest rate changes or additional QE). Booms are created through a rapid expansion of credit, caused by an easy money policy, which is inevitably followed by a bust when credit undergoes a contraction (the boom and bust cycle).
Source: All images are from the BLS.