Friday, September 18, 2020

The Employment Report and Why it Matters

 

 

By Darcie Guerin
darcie.guerin@raymondjames.com

We are drowning in information but starved for knowledge.John Naisbitt, Author of the bestseller, Megatrends, born in 1929.

 

Question: Financial news channels place a great deal of emphasis on the jobs report. Please explain why this is such an important report and why it matters to individual investors.

Answer: The Bureau of Labor Statistics releases the jobs report, also known as the Employment Report, on the first Friday of each month. Investors, employers and policy makers eagerly await the findings that provide insight to the relative strength or weakness in the job market. Economic growth depends on consumer spending levels, and spending relies in part on job and wage growth. Therefore, jobs matter, and they matter a lot.

How

Before discussing what the report means and why it matters, it may be helpful to understand how the data is gathered. The report consists of two surveys. The first is the Household Survey that looks at 60,000 households to determine employment or unemployment status. This information is used to calculate the labor-force participation and unemployment rates. The second component is the Establishment Survey assessing 588,000 worksites for information on all United States paid workers except farm employees, government employees, nonprofit organization employees, and private household employees. The analysis provides details about payrolls, average weekly hours, and average hourly earnings.

Why

The Jobs Report, or Employment Report, is a powerful piece of government data providing insight into the health of our economy. Here are the top five economic concepts and relationships gathered from this monthly report:

  1. Job growth

If employment trends are improving, it’s logical to assume that the overall economy is doing well. Jobs equal money, which equals spending. Economists want to know what types of jobs are being created. Not all jobs are equal. Wages vary by industry and type of job. It helps to know if job growth is strongest in retail, restaurants, construction, health care, manufacturing, technology of finance. Job growth by sector shapes spending patterns and trends.

  1. Labor market slack

Unemployment increases when there are more workers than jobs. Employers are interested in this information. In the current economic recovery, many workers have just given up looking for work and are no longer officially classified as “unemployed.” This results in a lower-than-actual unemployment rate number. Identifying those who may be “underemployed” or earning less than they’re capable of earning, and those who are in part-time positions not by choice offers clear understanding of the labor market.

  1. Inflationary pressure

Wages are the cost of labor. A strong and growing economy will experience wage expansion or growth. Some have called the economic recovery we’re experiencing the “jobless recovery” because wages have remained stagnant.

Basic Econ 101 Supply and Demand concepts help employers and policy makers formulate forward-looking predictions. Wage inflation means growth in pay resulting in more income that is spendable for workers. This in turn increases demand for goods and services, which leads to more jobs. Yet higher wages also increase corporate costs that may translate into higher prices for consumers. Just like in nature, economics is a delicate balancing act; for every action there is an equal and opposite reaction.

  1. Monetary policy

The Federal Reserve also watches the monthly jobs report number closely, especially when making decisions about interest rates. Interest rates are the cost of money. Monetary policy is one way The Fed influences interest rates, and controls the money supply, inflation and employment levels. For the past eight years, rates have been at historic lows. If rates rise, it will be to slow down an overactive economy. The jobs report is one way to determine if the economy is overheated and if rates need to rise. A stronger economy isn’t necessarily a bad thing. Yet, investors seemingly fear and discussion of the Fed raising interest rates. The question is whether the economy is getting too hot or if it’s just warming up. Rates would rise to slow overzealous or exuberant economic activity.

  1. The stock market

Financial markets are the economic engine of our economy. Like everyone else, the stock market loves good news. Since job growth generally means that the economy is doing well, employment reports can drive share prices higher presuming companies and their earnings will improve. For these reasons, many eagerly await the monthly Employment Report. Volatility often increases while stock and bond markets digest the information.

The Employment Report matters, but like any economic indicator, it’s only one piece of the puzzle. When evaluating your portfolio, it can be helpful to understand how this economic indicator influences economic activity and developments. Start by knowing what you own and why you own, then you’re better equipped to assess your unique situation. The trend is your friend, and one report does not make a trend. Stay focused and invest accordingly.

 

The opinions expressed are those of the writer and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame design) in the U.S.

 

This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/InvestmentInsights

 

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