Why a U.S. jobs report may matter to you

Investors everywhere tend to keep one eye on the U.S. economy due to its size and sway. Of all the statistical report cards on the U.S. economy, few get as much attention as the monthly U.S. jobs report.

So what’s all the fuss? And what should an investor be looking for in these jobs reports?

Issued by the Federal Bureau of Labor Statistics, the report focuses on three key statistics: the number of U.S. jobs created (or lost) during the previous month, the current unemployment rate and growth in wages. For instance, the June report on May jobs was strong – it reported 280,000 new jobs in the U.S. economy, an unemployment rate of 5.5% and a very slight uptick in wages.

Interpreting the key indicators

The number of jobs created speaks to underlying economic activity and the confidence businesses feel about the future. Skittish companies don’t hire many people; emboldened ones do. Moreover, people who have new jobs are likely to have more income to spend on housing, cars, clothing and so on.

The unemployment rate is not so much about the number itself, but any signs that the unemployment rate is about to fall below the non-accelerating inflation rate of unemployment (NAIRU). I know – is a dreary term. What it means is that once unemployment falls low enough, typically wages increase as employers bid for employees.

That isn’t necessarily a bad thing, of course. Higher wages give Americans more buying power, and a little inflation can be a good thing when it’s symptomatic of wage growth, healthy consumer demand and confident spending. But if pressure on wages becomes too strong, then inflation can become a real threat. The challenge is knowing when that inflationary flip is going to take place. It’s one of those things we see only in hindsight: “Oh, THAT was the number that made wages inflationary!” But we can look for signs a change may occur.

And that rolls into the third statistic: Wage growth. This has been the missing piece of the current recovery – even as unemployment falls we haven’t seen much of a boost in wages. Again, we haven’t yet seen the inflationary flip that indicates rising wages. That may be because workers are still worried about job security and aren’t demanding higher wages, or there may still be more slack in the jobs market than current numbers indicate.

It’s also important to take jobs numbers in context. This year’s March figures were terrible – only 85,000 new jobs (revised figure as of May 8, 2015). But those numbers probably were skewed somewhat by horrible weather and a port strike that slowed shipments of many U.S goods out of the country. So we’ll be looking for the May numbers to see if solid growth is continuing from April and March was an outlier, or if the U.S. economy is a little weaker than we thought.

Ultimately, all these numbers speak to a fundamental issue for most investors: How much spare capacity exists in the U.S. economy. That’s especially true in 2015. We’re now in the sixth year of recovery from the great recession – a length of time on par with the duration of most economic expansions.

As long as there seems to be spare capacity in the economy, the U.S. Federal Reserve (the Fed) is not apt to remove the punch bowl of super-low interest rates any time before September, and perhaps not even then. Plus, in the face of modest growth, any rate hikes are themselves apt to be modest. But if things really pick up, look for the Fed to tap the brakes a little more firmly.

Site preferences