Why Wall Street and Main Street Watch the Employment Situation

Even though the economy began to grow again in June 2009, jobs were painfully slow to follow. Employment started showing signs of improvement in the second half of 2011, exceeding the expectations of economic forecasters.

Nonfarm payrolls rose by 200,000 in December 2011, marking the sixth straight month that the economy added at least 100,000 jobs.¹ In addition, the unemployment rate fell four months in a row, reaching 8.5% in December 2011.²

Employment report data may offer some insight into current economic conditions and potential future trends. In response, markets can rise when a report is viewed as encouraging, especially when the data is better than expected, and they may fall when a key statistic is perceived as disappointing.

Investors, economists, the business media, and the general public all tend to keep a close eye on the following government reports, because statistical changes sometimes mark turning points in the state of the nation’s labor market and the health of the economy.

Windows to the Workforce

The monthly Employment Situation Report released by the Bureau of Labor Statistics on the first Friday of each month has two components. Information collected from the “establishment survey” is used to estimate the number of jobs created or lost during the month, and to track such nonfarm payroll data as hourly earnings, the average number of hours worked per week, and private-sector employment. Statistical methods are also used to calculate the current unemployment rate from data captured by the “household survey.”

TheUnemployment Insurance Weekly Claims Report is issued each Thursday by the Department of Labor. It details the number of people who file for unemployment benefits nationwide for the first time during the previous week, and also provides a four-week moving average intended to smooth out volatility that can result from seasonal factors or unusual events.

Weekly initial jobless claims below 400,000 generally indicate that labor market conditions are improving. In mid-January 2012, initial jobless claims fell sharply to 352,000 (the lowest level in nearly four years) from 402,000 claims in the previous week.³

Many economists believe that more than 125,000 jobs need to be added each month just to keep up with population growth.⁴

What Took So Long?

A variety of factors, such as the sovereign debt crisis, the threat of recession in Europe, uncertain tax and regulatory policies in the United States, and weak consumer demand for goods and services, may have caused companies to take a “wait and see” approach regarding staffing needs.

Businesses were also offered incentives that may have resulted in the substitution of capital spending for labor. Temporary tax breaks allowed companies to write off 100% of 2011 investments in the first year, and historically low interest rates made it inexpensive to borrow capital for improvements. From the point at which the economy started recovering in 2009 to the end of 2011, business spending on equipment and software surged 31%, whereas private-sector jobs grew only 1.4%.⁵

The Year in Review

On the whole, the labor market strengthened in 2011. About 1.6 million jobs were added to the economy last year, compared with 940,000 in 2010.⁶ The unemployment rate fell from 9.1% in January 2011 to 8.5% in December.⁷ Job growth also became broader based by the end of the year as it spread to more industries, some of which tend to pay higher wages.⁸

Unfortunately, the unemployment rate remains well above historic norms, and more than six million jobs are needed to return to pre-recession levels reached in 2008.^9–10

Year-end data suggesting that the job market may be headed in the right direction was also reflected in the larger economy. Economists estimate that gross domestic product grew at a 3.0% annual rate in the final three months of 2011, which was much higher than the 1.8% growth rate reported in the third quarter.¹¹

Recent trends may be encouraging, but it’s still unclear whether the employment picture will continue to improve in the coming months. A number of factors could affect economic growth for better or worse in 2012, which is why it may not be wise to read too much into any report, regardless of how newsworthy it seems.

1, 6, 11) Associated Press, January 19, 2012
2) CNNMoney, January 6, 2012
3, 9) The Wall Street Journal, January 19, 2012
4, 10) The Wall Street Journal, January 6, 2012
5) The Wall Street Journal, January 17, 2012
7) U.S. Bureau of Labor Statistics, 2012
8) Associated Press, January 6, 2012

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