Employment Situation - Household and Establishment DataBy scorpion
Published: October 26, 2009
Data: U.S Department of labor
Release time: At 8:30 AM First Friday of every month
Source: Bureau of labor and statistics
Why is it important?
The employment situation is the lead monthly indicator of the aggregate economic activity since it combines all the major sectors of the economy. It is very detailed and elaborate and is always conveniently available at the beginning of the month. Many other economic indicators will rely upon the information obtained from this report. It encompasses information about the labor market, the income and production as well as the production rates. In short, it provides clues about other economic indicators reported for the month and has a big influence in financial market perceptions through the entire month. The employment situation data gives the most comprehensive report on how many people are looking for jobs as well as how many are already in employment. It even elaborates the information further by detailing what they are earning from the jobs plus the number of hours they work per day. This information provides the most relevant way to gauge the current state as well as the future direction of the economy. The sector categorization of the data can be very useful especially to investors who may be interested in knowing the best sectors of the economy to direct their investments during a particular period.
Labor statistics tell a lot, although they do not necessarily define the economy. As one of the most widely watched reports, the Employment Situation Report gets a lot of press and can move the markets by influencing public opinion. Summary analysis provided by the BLS (top link on the site) on the top-level release of an already detail-rich report resonates with investors on a personal level since everyone understands the implications of having a job or looking for one. The fact that it covers the service industry makes it an all-inclusive indicator, as most other indicators do not reflect the goings on in the services sector. It is however notable that some industries such as financial services can remain profitable even during tough labor markets periods. Lastly, the Fed watches this report intensely. The unemployment rate alone caters for over 47% of the lagging index created by the Conference Board and used by the Federal Reserve Board in most of its key decisions regarding the country’s monetary policy.
The process includes the compilation of data from two surveys, the individual households and the business establishments’ data. The household survey determines the monthly unemployment rate, while the business establishment survey which estimates industry employment levels. These employment data are great indicators of current economic trends. The North American Industry Classification System (NAICS) identifies Industries included in the BLS establishment survey. The system includes 20 super sectors, under which similar industries are grouped and then categorized by unique numeric identifiers.
The calculation is based on two separate surveys in this one report. The unemployment rate is derived by dividing the number of unemployed persons by the total number of persons in the labor force, which comes from a survey of 60,000 households. The counting does not include detailed information regarding people with more that one job or those working on a part time basis. It simply takes note of any one employed regardless of how or where. Only actively, job-seeking persons are considered as unemployed. Other commonly known figures from the Household Survey include the labor supply and the discouraged workers’ survey. The other is the establishment survey, which is a sampling of over 400,000 businesses across the country. It is the most comprehensive labor report available and covers about one-third of all non-farm workers countrywide. It therefore represents final statistics covering more than 500 industries across hundreds of metropolitan areas. For a more accurate computation of this report it is however advisable for any investor to think about the hourly work rates as well as the over times worked across the week which the report does not usually give in their detailed status. These can be found on the average workweek report.
Impact on forex trading
The employment statistics provides an insight on wage trends. Fed officials must constantly monitor this data in search for even the slightest signs of potential inflationary or deflationary pressures, regardless of prevailing economic conditions. If inflation stays under control, it is easier for the Federal bank to maintain an acceptable monetary policy. Wage inflation is therefore a major concern for the Federal Reserve if they are to manage the effective administration of economic stimulus. It is possible to gauge the direction of the economy by tracking the jobs data; investors can thus sense the degree of tightness in the job market. If wage inflation is eminent, it is almost authentic that interest rates will rise while the bond and stock prices will fall. Only investors who are capable of accurately interpreting this report and taking the appropriate steps will remain afloat in the eventual end.
The rise in unemployment rates during cyclical downturns and falls during rapid economic growth periods is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates. The shift in interest rates by the Federal Reserve banks is directly influential to the forex trade. Since non-farm payroll employment indicates the current level of economic activity, its increases translates into greater purchasing power. A higher purchasing power increases the demand for consumer goods. These rapid increases in liquidity may cause fears of inflationary pressures during economic expansions if rapid demand for goods and services cannot be met by current production a situation that may greatly influence the value of the local currency. Another significant influence to the forex trade resulting from the employment situation comes from the shifts in the bonds and equity market. The bond market falls when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data since low interest rates are good for stocks. Nevertheless, sometimes the two markets move in opposite directions owing to the strong labor force’s positive influence on production and economic growth as well as corporate profits.
How does it affect the stock markets?
The anxiety at Wall Street each month is usually at its peak pending the release of the statistics on the employment situation, the reactions are dramatic considering the invaluable information that is provided by the report. Going beyond the main item thus the unemployment rate, investors can take advantage of unique investment opportunities that often arise in the days surrounding this report. The release of the report always triggers a significant amount of activity at the stock market as every body struggles to realign themselves I accordance with the perceptions inspired by the report. It is a proven fact that wall streets always experiences a precedent increase in the number of transactions during the period as well as the coming days following the report’s release. The influx of investors into the economy or their exodus is largely influenced by the report; this is because the investors know clearly well that a persistent increase in unemployment is a clear indication that the economy is headed for a decline. Others also predict increases or decreases in interest rates around such times and will therefore try to dispose of their holdings or to buy more holdings according to the perception they derive from the report.
The study of the labor report in search of trends in disposable income is paramount to any investor, Investors should also study wage inflation and employment statistics for industries of personal interest to them. Analysts argue that if payrolls are increasing and wages are rising, then personal consumption stats such as retail sales will similarly advance, as more people will Increase their personal expenditure. Since the household survey takes into account demographic changes, whereas the establishment survey only counts the total number of payrolls, it is advisable to combine the two to have a more curate analysis. It is however important to incorporate the figures here in conjunction with the Employment Cost Index, which is released on a weekly basis. A key to look for is whether wages are keeping pace with inflation; if not, the purchasing power is likely to drop and a smart investor should strategize to litigate against the effects there after. The number of hours worked should help in determining the direction of economic growth or decline since most companies always start by stretching the working hours of existing workers before employing new ones if the economy grows and the exact opposite incase the economy registers an eminent decline. In conclusion, the employment situation is a very significant report that dramatically influences transactions at the stock market. It not only influences the perception of the investors but also greatly influences the federal board s actions regarding the state’s monetary policies. Any investor in stocks can only ignore the report at his/her own peril.- 3446 Views
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