Let’s talk about employment and the variety of statistics that we all look at, sometimes on a weekly basis, a monthly basis, across the spectrum of employment data. We know a very popular report comes out every fourth Friday that covers both payroll gains, or losses, for that prior month as well as the unemployment rate, and there’s a lot of sub-statistics in that report that also provide a lot of nuggets to give us a flavor of the labor market. There’s other reports that come out from places like the Job Openings and Labor Turnover Survey. We’ve got initial unemployment claims that come out on a weekly basis, but I want to talk about them in the context of leading to lagging indicators, because I think one of the mistakes that investors make when trying to connect the dots between economic data and what the stock market is doing is not understanding the relationship between leading and lagging indicators. In fact, the stock market is one of the more leading of economic indicators.
So, let’s go back to the jobs data. Three of the most common data points that we look at to measure the overall employment picture would be initial unemployment claims, again that’s a weekly data point; the payroll number, how many jobs were created or lost in the prior month, and then of course the unemployment rate. In that order, they go from leading, to coincident, to lagging indicator. In other words, those three popular employment metrics, you tend to get the initial heads up of maybe a change in direction from initial unemployment claims. You then subsequently see it in the payroll data. The last thing, typically, to move is the unemployment rate.
So, three common measures, but there’s another measure, actually, that doesn’t get a lot of attention, other than when you really start to see a significant change, that actually leads the leading indicator of unemployment claims, which is layoff announcements. Intuitively it makes sense. The first thing companies do is maybe they shorten their hours, they start to lay people off. That means people then have to go and file for unemployment insurance. Companies start to show it in their payroll releases, where they start to shrink their workforce, and then finally it shows up in the unemployment rate.
The only reason why I mention this is in the face of still a very very low unemployment rate, very strong payroll growth recently, unemployment claims that are still on the very low end of the long-term trend, but as of May we’ve seen an eighty-six percent year-over-year increase in layoff announcements. That is the key to watch to see whether it starts to filter into that leading indicator of claims, which ultimately will be seen in payrolls and unemployment rates. So, the unemployment rate is important, but don’t focus on that as if it’s going to give you a heads up of a turning point. Focus on those more leading of jobs indicators.