Week Ahead: Looking Forward To The Jobs Report
Every month, when jobs week comes around, it is tempting to make it out to be the be all and end all of economic data. At times the employment situation is indeed the principle influence on the stock market, and even on other markets such as forex and oil that seem to be less directly connected to unemployment.
However, at other times, there is something else driving prices and the monthly jobs report has no more significance than any other data release.
On Friday, the Bureau of Labor Statistics will give their jobs report for April, so should all eyes be on the numbers or not?
The short answer is yes, but for different reasons than those that have caused us to follow the numbers so closely over the last few years. We have become accustomed, after eight years or so of slow, grinding recovery from an extremely deep recession, to placing enormous significance on non-farm payroll increases.
It is easy to forget that at the end of George W Bush’s eight years as President the U.S. economy was shedding jobs at an average rate of around 700,000 each month and quite how traumatic that was.
The focus since then has understandably been on repairing the damage that that recession caused to the employment market. At this point, though, it could be argued that, as the Fed now believes, we are at or very close to full employment, so the monthly employment statistics have a lot less significance than in recent years.
That is a logical argument, and is supported by the hard evidence too. The jobs report for February (marked on the above chart by the vertical blue line) was better than expected but still reflected a gradual decline in the pace of employment growth. After initially trading a little lower, however, the market continued its climb towards record highs.
There are two things at play here.
Firstly, as stated above, the closer we get to full employment the more that downward trend in the rate of growth is a natural occurrence and not something to worry about. Secondly, traders and investors understand that the last couple of months’ jobs reports have told us nothing about the future.
It takes time for the effects of policy or administration change to be seen in economic data. Recent market strength has been based on the belief that the policies enacted by a Trump administration, backed by a Republican controlled Congress, will offer enormous benefits to corporate America. A couple of months of slow growth left over from the last administration have done nothing to change that opinion.
None of that means that the report has no significance. So far the market has been very tolerant of the slips and stumbles of this administration and remained focused on tax cuts and deregulation. The failure to pass a healthcare bill and various other setbacks have been forgiven as a host of regulations have been rescinded and a tax plan focused on cuts was released.
Friday’s release could, however, be a lose-lose for the White House. If the number is weak then it will be seen as a warning, but even a strong number creates problems. Gains in employment combined with big wage increases could point to a risk of inflation and leave the administration with an unenviable choice.
They could continue as planned with stimulative measures such as tax cuts and expanded infrastructure spending, and thus introduce a serious risk of real inflation. Or they could change tack somewhat. If they elect to continue with stimulus then the short term reaction of the market could still be positive.
Over time, though, if a tight jobs market is combined with stimulative fiscal policies the Fed would have to compensate with much tighter monetary policy and that could easily kill the rally in stocks. Despite the risks though, the situation dictates that this is by far the most likely course of events. Changing policies three months into an administration is unthinkable for any politician and not really on the cards.
So, despite the fact that the unemployment report carries less weight than we have become accustomed to during the recession, this week’s numbers will be eagerly anticipated. Somewhat counter intuitively however, it could well be that a strong number actually carries more risk to market valuation than one that is weak. A beat, therefore, may not be a good thing and traders and investors should be looking for an “as expected” jobs report.