Schwab Guide To Economic Indicators: Labor Report

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Schwab Guide to Economic Indicators: Labor Report

November 30, 2007

What is it?
The labor report assesses a variety of employment conditions from the vantage point of both employers and households. It's published by the Bureau of Labor Statistics (BLS).

How is it calculated?
The labor report comprises two separate surveys, each with various components:

The establishment survey is based on a sample of 400,000 business establishments. Notable statistics include nonfarm payrolls, hours, and earnings.
The household survey covers nearly 60,000 households, and is mostly known for producing the unemployment rate and other data related to the labor force.

How is it used?
Many economists and market analysts use the trend in nonfarm payrolls to gauge near-term employment conditions. However, the two surveys independently tally the number employed. While the surveys tend to track each other over time, they can vary widely from month to month. According to the BLS, the establishment survey's nonfarm payroll results carry more weight. Yet the BLS also maintains that both surveys are needed to obtain a more complete picture of the overall labor market.

Why? Each survey attempts to mend the other's shortfalls. While the establishment survey can be more comprehensive because it covers a larger sample, it doesn't include agricultural, private-household and self-employed workers. These are counted in the household survey. Soft employment conditions tend to increase the number of self-employed, because many people who were laid off eventually start their own businesses. Since the household survey includes the self-employed and has a better chance of counting new hires at newly formed small businesses, it can be the more useful survey when the economy is exiting a period of soft conditions.

In addition to watching nonfarm payrolls, economists and analysts use the labor report to gauge disposable income, wage inflation and employment by industry.

What is its relative importance?
High. Despite being a backward-looking indicator, the labor report is very important given employment's meaningful impact on consumer spending, which accounts for nearly two-thirds of all economic activity.

What impact does it have on the market?
Typically, the most influential aspect of the labor report is the degree to which nonfarm payrolls, along with revisions, meet expectations. Yet factors outside the report also play an important role, especially the relative valuation between stocks and bonds and where the economy is thought to be within the business cycle—is it experiencing slack or overheating?

If nonfarm payroll growth exceeds forecasts to a degree that suggests a surprising overheating of the economy, bond prices typically fall (and yields rise) in expectation of greater demand, potentially higher inflation and future Fed rate hikes. Stock prices may also fall, because rising bond yields can undermine the value of stocks relative to bonds. This can happen even if the strong payroll gains seem to support corporate profit growth—the market will likely see it as short-lived given the impending rate hikes and eventually slower economic growth suggested by this scenario.

In contrast, if nonfarm payroll growth exceeds forecasts during periods of slack economic conditions, this can provide an initial boost to stock prices. How? While the likely drop in bond prices and rise in bond yields can weaken the value of stocks relative to bonds, the market's expectation of potentially higher profit growth can override this for a time.

When is it released?
The BLS releases the labor report on the first or second Friday of the month (usually the first). You can find it on the BLS home page under the Economic News Releases section, labeled Employment Situation Summary.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

(2007-5771)

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