The Jobs Report Matters – But Should It?

On the first Friday of every month, investors await the release of the monthly jobs report (also called the employment report). The jobs report is one of the most closely watched, and potentially most significant, of all monthly economic indicators. The jobs report lists how many new nonfarm payroll jobs were created in the prior month, calculates an adjusted unemployment rate (based on labor-force participation) and provides guidance about the rate and pace of wage growth for U.S. workers.

The jobs report is a robust report that pulls data from two separate surveys. The Household Survey measures the unemployment rate by measuring the number of unemployed as a percentage of the “active” labor force (many people are not in the labor market by choice). The second survey is the Establishment Survey which helps calculate nonfarm payroll jobs as well as other metrics such as average workweek and average hourly earnings.

Why the jobs report matters to Main Street?

Consumer confidence is one of the most accurate predictors of economic expansion or contraction. When employees are hiring, it is a psychological boost to consumer confidence. When companies are hiring, consumers feel more confident about their personal job prospects. It can be a time when they actively seek a new, and better paying, position. And since job creation is a symbol of a strong economy, consumers may feel more comfortable with their discretionary spending. They may also feel more optimistic about assuming the financial burden of a mortgage, car loan, or other forms of debt. However, when employees are cutting jobs, consumers will tend to put more of their money into savings, thus “pulling money out of the economy”.

Why the jobs report matters to Wall Street?

However, as important as the jobs report is to individuals, it is equally significant to Wall Street. One reason for this is the sector-specific data it provides. The jobs report displays macroeconomic (i.e. big picture) data. But investors want to know how that data will affect specific companies and sectors. Even a report that shows an overall net gain will typically have sectors that show net job losses. Likewise, when overall job growth is negative, there are always pockets of growth. The jobs report can give investors a clearer picture of which companies are likely to see stronger earnings and which ones are likely to have a rough quarter. The companies and sectors that are hiring will usually reflect that growth with stronger sales and earnings, which will propel their stock higher.

Yet another reason why the jobs report matters to investors is that it provides guidance about the country’s future economic and monetary policies. For example, if institutional investors are anticipating that the Federal Reserve will cut interest rates, a strong jobs report can be viewed as a negative sign. This is because, if the Fed views the economy as being strong, they will be less likely to lower interest rates for fear of having the economy overheat.

Which leads to the question…if a good report can send the market falling, how much importance should be placed on the jobs report?

Lies, damned lies and statistics

The former British Prime Minister, Benjamin Disraeli once warned against the overuse of statistics by saying there were three kinds of lies: lies, damned lies, and statistics. In a country that worships at the altar of analytics, investors are trained to hang on the release of every economic report. Financial news networks have countdown clocks that let viewers know exactly when the data will be released. With that kind of buildup, it’s easy to place too much significance on the jobs report. In reality, it is just one of many data points that should be important to investors. It’s important for every investor to put the jobs report, good or bad, in context with their portfolio. Good companies don’t suddenly become bad and bad companies don’t suddenly become good.

But a bigger caveat to the jobs report is that it is a leading indicator. This means that the activity reported in the employment numbers is not being detected in the overall economy at the time the report is released. However, it can signal what may happen in the future. In the case of the jobs report, it can be understood that even though companies may be hiring, it may be several months before the economic benefit of those hires is reflected in the country’s GDP.

And like other leading indicators, the jobs report is also subject to future revision. It’s not uncommon for a weak job report to show underreported jobs which leads to the report being revised upward in subsequent months. Conversely, there are times when a jobs report is revised downward after the initial report.