EMPLOYMENT SITUATION

Market Sensitivity: Very high

What Is It: The most eagerly awaited news on the economy. Are jobs being created? It has great economic and political significance.

News Release on Internet: http://stats.bls.gov/news.release/empsit.toc.htm

Home Web Address: http://stats.bls.gov/

Release Time: 8:30 AM (ET); announced generally on the first Friday of each month and covers the month just concluded.

Frequency: Monthly

Source: Bureau of Labor Statistics, Department of Labor.

Revisions: Can be major. Revisions often go back two months with each release. The government does benchmark changes for the establishment (or payroll) survey every June. Benchmark changes for the household survey are rare, about 10 years or so.

What Is It Important

This is the big one! No single economic indicator can jolt the stock and bond markets as much as the jobs report. The reason? To begin with, employment news is very timely. It’s released just a week after the end of the month being reviewed. Second, the report is rich in detail about the job market and household earnings, information that can help forecast future economic activity. Third, let’s face it-we’re talking about the well-being of American workers. Wages and salaries from employment make up the main source of household income. The more workers earn, the more they buy and propel the economy forward. If fewer people are working, spending drops off and business suffers.
Because household spending accounts for two-thirds of the economy’s total output, you can see why the investment community pays such close attention to the employment report.

There is another reason why it has such a hold on the financial markets. The job numbers often contain surprises. Experts have a difficult time trying to predict the unemployment figures because there’s no little other information out yet for that month.

The highlight of the jobs report is, of course, the unemployment rate, which is the percentage of the civilian workforce that is unemployed. What do we mean by civilian workforce? By definition it is anyone 16 years or older who is classified as employed or unemployed (excluding the population in the military, prisons, mental hospitals, or nursing homes). Economists measure monthly changes in the job market from two different sources. One is based on the household survey, which the government conducts by telephone and mail interviews of households. The other is the establishment (or payroll) survey, in which companies are directly queried about recent changes in staffing

Together, the two surveys paint a sweeping picture of the labor market and, more broadly, the state of the economy’s health.

How Is It Computed

Household Survey

It’s from the household survey that we derive the widely-reported unemployment

rate. Each month the government contacts 60,000 homes, a population that includes farm as well as non-farm workers, the self-employed, domestic helpers, and-believe-it or not- even those U.S. residents who commute to jobs in Mexico and Canada. (The point of the latter is that these Americans still earn money, make payments to the IRS, and are close enough to the U.S. to spend a part of their income here.)

The response rate from households is fairly high-about 95% of those queried do respond. Thus, out of 60,000 households, some 56,000 come back with answers, while 3,000 are not heard from. All the interviews are done either in the week that contains the twelfth day of each month, or just days later. Based on the information received, the size of the civilian labor force is calculated, along with how many of these people currently have jobs. Then comes a simple equation: divide the number of those over the age of 16 who are not working by the total number of people in the civilian labor force and voila!-you have the unemployment rate. If the size of the civilian labor force is 100 million and 5 million of them are out of work, the nation’s unemployment rate is 5%.

While it’s not rocket science to identify someone who is jobless, there is a bit more confusion about who is actually included in the labor force. Normally we do not count the military because everyone in uniform has a job, which is to protect the U.S. So the civilian labor force is the main measure used to quantify the pool of labor available in the economy. However, after that, the definitions get a little cloudy. Among the government includes in its labor force only those who are actively looking for work. Any jobless person who is so discouraged by the poor employment prospects that he or she is not actively seeking employment is excluded from the labor force count and thus is not reflected in the main unemployment rate.(To be fair, the employment report does not reflected in the main unemployment rate that includes even discouraged workers, but this little-known figure is buried deep in the 25-page release. You’ll see precisely where in the next section, The Tables: Clues on What’s Ahead for the Economy.)

The data in the household survey can be quite valuable to anyone doing research on demographics and marketing. It breaks down the population of those who have jobs-and those who do not-by age, sex, ethnicity, educational achievement, and marital status. The highest jobless rate is usually found among teenagers, both male and female. That’s followed by blacks, Hispanics, and then whites. The lowest unemployment has traditionally been married men. Clearly, lots of useful information can be gleaned from the data. However, one should bear in mind that the household jobs survey has one serious vulnerability. Its integrity is based on the answers given by household members, and they might not always be accurate.

Establishment Survey

The establishment survey-often referred to as the payroll survey-is considered by many to be a better employment measure than the household survey, and it has consequently grabbed most of the attention of the press and money managers around the world. What’s special about it? The information it gathers on the job market comes directly from business establishments, not households. The Bureau of Labor Statistics gets in touch with 400,000 companies and government agencies. These entities employ more than 40 million workers, or about 45% of total non-farm employment. The information is obtained by both mail and telephone, and it is collected using the same mid-month schedule as the household survey. Given the large number places to contact, only 60% to 70% of the responses make it back in time for the first scheduled release of the employment numbers. The reason for the initial low response is that small businesses are notorious for being late with their replies, yet these firms traditionally are the first to hire and fire workers. As more of the eventually submit their answers, the response rate climbs to the mid-80% range, which forms the basis of subsequent revisions in each of the next two months.

The establishment survey includes all persons on the payroll of non-farm businesses, non-profit groups, and local, state and federal government offices. Even residents Mexico and Canada who travel to their jobs in the U.S. are counted. The only groups excluded from the establishment survey are farm workers, the self-employed, and domestic help.

What makes the establishment survey such a favorite among economists and investors is that it contains a veritable gold mine of data on the latest changes in employment and income, information that can reveal much about how well the U.S. economic machine is working. To give you a sense of richness of the data in the payroll numbers, the government looks at more than 500 different industries. Among the most important statistics from the report is the net number of new jobs formed or lost in the latest month. How long did the average workweek last? How much overtime was generated? What were the average hourly and weekly earnings in the month, and how do they compare to earlier periods? The establishment survey also breaks down many of these issues by geographic location and by specific industries, so you can quickly tell which businesses and regions in the country are doing well and which appear to be in a slump.

An interesting question arises at this point. Because the household and establishment surveys are based on two different sources, to what extent do they agree with what’s happening in the employment market? It should come as no surprise that they occasionally tell conflicting stories. For instance, if the unemployment rate, a figure derived from the household survey, drops one month, it gives the impression that the economy is improving and that more people are finding jobs. Yet the establishment survey may simultaneously report that tens of thousands of jobs were actually lost that month.

Why do the two measures occasionally diverge? The reason is they each probe the job market from different perspectives. The household survey collects data on working-age individuals, while the establishment survey doesn’t bother with age. It merely asks companies if they hired new workers. Second, the two surveys have separate guidelines. The household poll includes both farm and non-farm workers, the self –employed, and domestic help. In contrast, the establishment survey covers a narrower population segment by looking only at non-farm workers in the economy; it excludes the others.

Another key difference between the two surveys is that the establishment report makes no distinction between full and part time work. Remember, its main focus is to report how many jobs were created. If one individual has two part time jobs, the household survey counts that as one employee, but the establishment survey considers it two jobs. Thus, if 100 new positions were created according to the establishment survey, it doesn’t necessarily mean 100 people found new employment. One individual could be holding a multiple part-time jobs. Thus, it is easy to see why the two reports might conflict. However, that doesn’t undermine their validity. Each survey has important information about the economy that the others lacks. In any event, over the long run, both the household and establishment numbers do move in tandem.

Market Impact

Employment news can greatly influence the dollar’s value in currency markets. A vigorous jobs report could drive interest rates higher, which makes the dollar more attractive to foreign investors. They can now earn more interest income by owning U.S. Treasury securities. On the other hand, an anemic jobs report softens demand for U.S. currency because it spells trouble for American stocks and puts downward pressure on rates, both of which make the dollar less appealing to foreigners.