At 8:30 a.m. EST on the first Friday of every month, the U.S. Department of Labor's Bureau of Labor Statistics releases the Employment Situation Summary, otherwise known as the Employment or Jobs Report. Based on the Current Populations Survey, which surveys households, and the Current Employment Statistics Survey, which surveys employers, the report estimates the number of people employed and unemployed, the number of hours being worked and a myriad of other related facts and figures. Its information is widely anticipated, forecasted and used by Wall Street firms, their economists and many business decision-makers. It may even impact broader public and corporate confidence, and therefore future business and hiring decisions.
What the Report Doesn't Say
The report is scrutinized for what it has to say about the state of the economy. The number of jobs being created can signify whether an economy is improving, overheating or waning. Unfortunately, since the numbers often get significant revisions long after their initial release, the Employment Report is not so much predictive as it is a confirmation of economic conditions. Also, the numbers can have unexpected swings from month to month with predictions being way off target for many months in a row.
For example, in a post-recession scenario, new jobs created might come in far below what economists were forecasting. Then there might finally be a month in which three times as many jobs as expected show up, causing the Federal Reserve to raise interest rates. The next month, however, the report could bring in terribly low numbers, and the information from the business and household surveys could be increasingly divergent, compounding economists' exasperation over the report's lack of predictability.
Uncertainty aside, in relation to other employment and economy-related indicators, the Employment Report does provide worthwhile information. In particular, unexpected results often indicate that something unusual is going on with the economy and employment.
Who Uses the Employment Report?
The currency market is the most driven by the Employment Report. This was shown in a 1995 study by the Federal Reserve Bank of New York, which noted several ways in which employment data impacted the currency market. An unanticipated rise in employment, for example, means a rise in the U.S. dollar. The study also reported that reactions to surprises relate to the implications on short-term interest rates. The currency market has become increasingly sensitive to the data and pays particular attention to the establishment survey.
But interest in the Employment Report doesn't stop there. The bond market is concerned with what the report may indicate about inflation and interest rates. A strong employment report may indicate an economy that is heating up too quickly, leading economists and traders to become concerned about inflationary pressure. However, it can also raise concerns about tighter monetary policy and forthcoming interest rate increases. The equity market looks for rising employment as a sign of corporate optimism and growth potential. It is also concerned with inflation and interest rates, but to a lesser degree.
The names of the two employment surveys indicate the facets of the population that they cover. The household survey interviews 60,000 households, while the establishment survey gathers data from 160,000 businesses and government agencies covering 400,000 work sites, or about one-third of all payroll workers. While the Employment Report is released monthly, the surveys actually cover only a single week that includes the 12th day of the month.
Both surveys have their merits and drawbacks. The household survey includes just about every kind of employed person, including self-employed persons, agricultural workers and even those who work in the home raising a family. The establishment survey includes only employees of companies that provide payroll counts. So even though its survey sample is large, the establishment survey misses a significant demographic and can misrepresent the employment rate when the number of self-employed persons hits extremes. The household survey, however, covers only 60,000 people and is often criticized for being volatile due to the relatively small sample size.
The Business Cycle
The number of self-employed persons can fluctuate significantly throughout the business cycle. Recession, layoffs and tight labor markets can drive many people to go into business for themselves. Many skilled laborers become consultants, and it's common for people to consult for their former employers. These people are often unaccounted for in the establishment survey, and a growth in the number of consultants tends to exaggerate the unemployment rate.
Conversely, when the economy begins to accelerate and companies start hiring again, many self-employed persons decide to go back on the payrolls for the steady paychecks and benefits. At such times, the divergence between the household and establishment surveys could reverse.
Another factor that impacts the payroll survey and not the household survey is the employee turnover rate. Every time someone changes jobs within the reporting period, they are counted twice - once by each employer. This goes on all the time, so it shouldn't greatly influence the change in employment numbers from month to month. However, over longer periods the turnover rate can vary throughout the business cycle. One theory is that turnover slows during the early part of economic recovery because workers are sensitive to layoffs and therefore want job security.
Both the establishment and household surveys consist of several components that feed into the Employment Report:
The Household Survey:
- Unemployment: The number of unemployed persons and the unemployment rate.
- Total Employment and the Labor Force: The total number of people employed and the proportion of the population age 16 and over that is working.
- Persons Not in the Labor Force: The number of persons marginally attached to the labor force. These are people who want to work and have sought employment in the past 12 months, but not in the past four weeks. They are not counted as employed. This component also reports the number of discouraged workers who believe no work is available for them.
The Establishment Survey:
- Industry Payroll Employment: Total employment and specific employment sector statistics.
- Weekly Hours: The average workweek for production and non-supervisor-level employees, and the hours worked by those employed in manufacturing.
- Hourly and Weekly Earnings: The average hourly and average weekly earnings of production and non-supervisor-level employees.
The Bottom Line
While the Employment Report might be volatile and subject to major revisions well after the fact, it remains a widely watched indicator of economic well-being. And the numbers it provides on employment influence the financial markets directly. The number of new jobs being created provides clues about the economy and corporate earnings, and indirectly provides insight on interest rates and currency prices.