- The April jobs report shows two sides: slower hiring and increased working times and wages.
- The long term outlook is pessimistic due to the constant decline in the labor participation rate.
On May 6, the Bureau of Labor and Statistics (BLS) released its monthly employment situation summary.
The report is released on the first Friday of the month for the previous month. It consists of two parts: one presents non-farm payrolls, hours worked and hourly earnings, and the other is created by surveying more than 60,000 households in order to extract the unemployment rate.
It is an economic indicator that investors and analysts anxiously look at as it is considered one of the best indicators in predicting business cycles. A rule of thumb is that an increase of 150,000 jobs indicates economic growth while any number lower than that indicates a weak job market and rough times for the economy.
Current Report and Long Term Trends
For April 2016, the jobs report showed slowed hiring and a slight increase in pay. Slower hiring could refrain the FED from raising interest rates. The non-farm payrolls rose by 160,000 and unemployment remained stable at 5%. This still does not mean much as those numbers are known to be volatile, but it is good to keep an eye on long term trends.
Figure 1: US non-farm payrolls from 2006. Source: Trading Economics.
The interesting part of the above figure is the 2006-2008 period where the first periods of no payroll growth had already happened in 2006 and only later resulted in the 2008-2009 recession. Fortunately, the current situation is still far from the 2006 declines. FED Chairwoman Yellen targets 100,000 monthly job additions as a healthy measure for a stable and slowly growing economy with full employment.
Something to worry about in the long term is the US labor participation rate. Pre-recession levels were at 66% while they are currently a 62.8%. The long term decrease of 320 basis points lowers the productivity of the US economy and makes the low unemployment rate of 5% questionable as 3.2% of the population decided not to return to the job market. The main factor influencing such a state is an aging population and the Congressional Budget Office (CBO) projects the labor participation rate to fall to 60% in 2025.
Figure 2: US labor participation rate outlook. Source: CBO.
A not so inspiring example of a declining labor participation rate is Japan. Its labor participation rate has been steadily falling since the nineties and resulted in prolonged economic stagnation.
Figure 3: Japan labor participation rate. Source: Trading Economics.
Fewer people working means less productivity and less productivity takes a big chuck off of economic growth. The above negatively influences the stock market in the long term.
Figure 4: Japanese Nikkei index. Source: Yahoo Finance.
The Japanese stock index Nikkei is currently at the same point where it was in 1986.
Current Market Repercussions
In the short term, the constant publication of new economic indicators makes it difficult to assess the impact of the monthly jobs data on financial markets. The disappointment of the last job report that missed the consensus forecast of 200,000 by 40,000 did at first influence a decline in the markets but nevertheless the markets finished on a higher note as investors expect the FED not to raise interest rates due to the weaker job market.
Figure 5: S&P 500 index on day of jobs data publication. Source: Yahoo Finance.
With Yellen targeting a 100,000 monthly payroll increase, the 160,000 for April does not look bad, but combined with the Q1 2016 GDP growth of only 0.5% it might indicate further procrastination in interest rate increases.
Hours Worked and Earnings
As companies are always reluctant to hire new employees, the hours worked can indicate where the economy is going. In April, the average workweek increased by 0.1 hour to 34.5 hours which means that companies are asking employees to work a little bit longer. Hourly earnings also increased by 8 cents to $25.53 bringing the year-over-year increase to 2.5%. Both increases indicate that there is more work and that the economy is doing fine. Also, these increases might push the FED to increase interest rates as the economy is reaching full employment and a 2.5% increase in wages is a good sign for the 2% target inflation.
This reports indicates one certainty: the US economy is not in any kind of stellar growth mode and such a scenario should not be expected anytime soon. The mixed results do not indicate a specific short term trend and thus imply stability, but stability is never the case in an economic environment. The long term outlook indicates slow growth as the quantitative easing and low interest rates keep the economy stable. Investors should be aware that there are increased risks attached to investing in the US economy, hopefully and probably they will not materialize but it is good to keep an eye on them.