The Jobs Report

Throughout an economic cycle, various economic reports become more important than others.

For most of my three-decade career, the monthly inflation report – the Consumer Price Index or "CPI" – had virtually no impact. In the post-COVID period, however, it suddenly became a report that could drive massive moves in the stock market.

When asked about a macroeconomic indicator and its impact on the stock market, this phenomenon brings us to our primary answer: "It depends."

Different macroeconomic metrics play different roles at various times during the economic cycle. As discussed above, they can become almost irrelevant for decades and then become market drivers.

One macroeconomic report that has never fallen into obscurity and has been making headlines recently is the "Jobs Report.”

When the financial media mentions this, they are referring to the "Employment Situation Summary" that the U.S. Bureau of Labor Statistics publishes monthly. It is published on the first Friday of each month and contains data for the previous month.

Here is a snapshot of the report from the BLS website….

There is a LOT of data here, and we will review the critical data most often referenced.

The first piece of data is the "Unemployment Rate." This is the percentage of people who are seeking employment and want to work but haven't found a job yet.

They break down this data into demographics and other categories, but at its core, it is used to understand the job market's health.

Here is a long-term chart of the monthly unemployment rate…

The chart shows that spikes in the unemployment rate coincide with periods of economic uncertainty or recessions.

For instance, unemployment significantly increased after the Global Financial Crisis and suddenly spiked during the COVID shutdown.

Investors usually focus on this measure when they are worried about the economy.

The U.S. economy usually grows at a steady rate, and when this happens, there is little focus on this number.

However, when concerns about a slowing economy or a recession arise, this number often receives increased attention. Negative results frequently drive the stock market lower.

On the other hand, when the economy is recovering from a recession and the stock market is looking for signs of recovery, the unemployment rate becomes the most important macroeconomic indicator. It will drive the stock market the same way the CPI has recently.

Over the course of an economic cycle, the unemployment rate is the most important metric in this report.

A secondary report that helps interpret the unemployment rate is the "labor force participation rate." Remember, we defined the unemployment rate by the number of people actively seeking employment.

We can see changes in the number of people seeking employment, which can change the unemployment rate even if the number of jobs has not changed.

If we see a significant spike in the labor participation rate and no change in the number of jobs, we will see a spike in the unemployment rate. Yet no jobs were lost.

This is a different type of signal than if the labor participation rate is steady and employers lay off millions of workers.

It is not just about the headline data with these macroeconomic reports but also about looking at the numbers behind them to understand them better.

Another metric in the report that is typically a focus is the "total nonfarm payroll employment." This represents how many jobs were added (or lost) to the U.S. economy during the previous month.

Like the unemployment rate, the BLS provides extensive demographic and other data details for this number. They break down the data by industries, such as transportation, health care services, government, etc. This data can provide additional insights about how the economy is evolving.

The focus on this number is similar to that on the unemployment rate. It is an indicator of the economic health of the United States.

Typically, the focus on this metric will be on the number of jobs added (or lost) in the previous month. In the screenshot we shared above you can see that they say…

“Total nonfarm payroll employment edged up by 114,000 in July, below the average monthly gain of 215,000 over the prior 12 months.”

In this case, Wall Street was expecting the U.S. economy to add 185,000 jobs, so this report was considered disappointing. It was seen as a sign of the U.S. economy slowing and risking a recession, which hit the stock market hard.

We wrote about it in HX Daily, you can read that report here.

As we mentioned before, there is a lot of additional data that is released along with this headline data. With this report, we pointed out that there was some background data that implied that perhaps there was “noise” around this number.

There is another weekly report called the “Weekly Jobless Claims” report. This one shows the weekly filings for unemployment claims and is a short-term view of employment.

We (correctly) predicted that these would come in better than expected and prove we were right about the abnormalities in the July report. This is what happened, and the stock market responded positively.

After periods of high economic growth and when the “leading indicators” begin to slow – like now – the jobs report begins to play a more significant role.

Given our current stage of the economic cycle, we think we will continue to de-emphasize the CPI report for now and see more focus on this jobs report.

Ultimately, though, it is the BIG PICTURE number that counts. As long as job growth is positive (one hundred to two hundred thousand) and the unemployment rate is low (below 5%), then we have a positive backdrop for the stock market.

While short-term moves might impact the stock market in the short term, the big-picture view really matters.