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Narrator: Near the beginning of every month, the U.S. Department of Labor releases one of the most anticipated pieces of economic data: the Employment Situation report, also known as the "jobs report" or the "labor report." This report attempts to measure various aspects of the labor market, including job creation, the unemployment rate, average hours worked, and how much money was earned. The jobs report is one of the best insights into the health of the U.S. economy, so it's important investors understand what the report says and how it can impact the markets.
There report has several components. The unemployment rate is the total number of people in the workforce without jobs but who are still actively looking for work. The Nonfarm Payrolls monitors full- and part-time job creation while excluding seasonal jobs like planting and harvesting. The average work week is the average number of hours per week worked in nonfarm jobs. And the average hourly earnings or wages rate measures how much workers earn in each industry.
The report is important because new jobs, low unemployment, and higher wages usually translate into higher spending and greater economic activity, while decreasing jobs, high unemployment, and stagnant wages can signal economic decline.
It's no surprise that such detailed information about the economy can move the markets, but exactly how markets respond isn't always intuitive.
As you can see, over the long term, as unemployment falls, stock prices tend to go up.
Animation: Chart showing long-term inverse relationship between S&P 500 and U.S. unemployment rate, 1995-2023.
Narrator: This makes sense because an optimistic economic outlook goes hand in hand with business growth and risk appetite, which may drive stocks up.
Additionally, wage growth is a good indicator of inflationary pressures building in the economy. Higher inflation usually translates into rising interest rates, which causes bond prices to decline.
But for a number of reasons, the short-term response to individual jobs reports is much less predictable.
For example, in June 2019, the jobs report showed lower-than-expected job growth, and the stock market rallied. But then in July, the jobs report showed stronger-than-expected growth, and stocks fell.
The reason? The Fed and interest rates. Slowing job growth may cause the Fed to reduce interest rates, which historically correlates with higher stock prices. On the other hand, job growth and low unemployment may spur the Fed to pump the brakes on economic growth by increasing interest rates, which typically depresses stocks.
Another reason the jobs report isn't a reliable indicator of the stock market is because the market can absorb employment information from other sources. The Employment Situation report isn't updated in real time; instead, it comes out only once a month. In the meantime, other reports may give clues about the jobs market.
For example, on the first Friday of April 2020, the Employment Situation report showed a huge loss of more than 700,000 jobs and an unemployment rate of 4.4% due to the Covid-19 crisis. Yet, stocks traded only slightly lower that day because investors had already expected negative jobs numbers.
Because it was already clear that coronavirus would deal a major blow to the economy, the market had already absorbed that information. In addition, other employment-related reports can provide clues about the state of the jobs market before the labor report is released, potentially dulling its impact.
Other job reports include Weekly Jobless Claims, which tracks unemployment benefit applications, the Job Openings and Labor Turnover Survey, or JOLTS, which tracks the latest job openings, and the ADP Employment report, which tracks the number of jobs gained. Many investors follow these reports to help them forecast labor report items. In the case of the Employment Situation report that came out on April 3, weekly jobless claims had already signaled an enormous decline in nonfarm employment.
Animation: Chart showing spike in weekly jobless claims in late March 2020.
Narrator: Of course, employment numbers only tell a part of the economic story, and investors should consider other indicators like gross domestic product, consumer spending, and capital investment when trying to paint a picture of the economic cycle.
Investors should be mindful of all jobs reports but pay particular attention to the Employment Situation report because of the important information it provides. While you may not be able to predict the market's reaction to the report, you can use it to help determine where the United States is in its economic cycle.
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