By Chris Stone
Employment is fundamental to the U.S. consumer-based economy. As such, the U.S. unemployment rate is likely the most heavily covered economic indicator relevant to the country's financial markets. (Unfortunately, this popular number tells traders very little about the state of the employment market. Other numbers - such as non-farm payrolls, which show the number of people finding jobs each month - have a more meaningful read.) But, just as important to the economy - and in turn, financial markets - is how efficiently employers are matching jobs to the available workforce (the unemployed). The Conference Board's Help-Wanted Advertising Index (HWI) was created to measure this important factor of job-market efficiency, and to indirectly measure unemployment. By making some data adjustments, traders can use the HWI, to their advantage, as it communicates a great deal about the productivity and competitiveness of American businesses.
Then outgoing U.S. president William Howard Taft reluctantly signed into law the Organic Act of the Department of Labor on Mar 4, 1913 (knowing his successor Woodrow Wilson would do the same). The Organic Act established the Department of Labor, which was the culmination of a half century of efforts by organized labor to create a "voice in the cabinet". Two years later, in July 1915, the Bureau of Labor Statistics (BLS) began publishing the still popular Monthly Labor Review. Among this data are the often-cited unemployment rate, non-farm payroll number and average hourly wages and number of hours worked. These numbers have become the primary data for judging employment conditions in the country, but they do not provide a comprehensive picture by themselves.
The Conference Board, looking for a way to augment the portfolio of employment statistics, created the Help-Wanted Advertising Index in 1951. The most obvious contribution made by the HWI is its measure of the changes in employment demand as represented on the classified pages of newspapers, which is considered a leading indicator of unemployment. The arguably more meaningful contribution is the HWI's indirect measure of the slack in the job market - that is, how many jobs are going unfilled, or how efficient the job-matching process is.
Later, we'll review a more recent release by the BLS called JOLTS (Job Openings and Labor Turnover Survey) for a more direct and detailed look at labor-market slack. But first, let's review how the HWI is constructed, as it provides a good starting point in understanding how the labor indicators work.
When the HWI was first created in 1951, the index totaled the lines of help-wanted classified ads from 52 leading newspapers, each from a different metropolitan statistical area around the United States. In 1972, the Newark Evening News was discontinued, and the HWI was reduced to 51 newspapers - this was one of only few amendments ever made to the HWI. Remarkably, despite shifts in both industrial demand and demographics, the 51 metropolitan statistical areas continue to represent around half of the total non-agricultural U.S. workforce, or 65 million people.
The HWI was re-based to equal 100 in 1987, and is released to the public in a monthly press release. The Conference Board releases a national number for the HWI, along with regional numbers representing nine segments of the country, and a percentage number representing the proportion of the labor market with rising want-ad volume. The current HWI report can be found on the Conference Board's website.
The top pane of the chart below exhibits the values of the Help-Wanted Index from Jan 1987 to Jan 2005. The lower pane charts the unemployment rate for the same time period.
This comparison shows how changes in the HWI are often not yet reflected in the unemployment rate. When the HWI shows movements that the unemployment rate doesn't, traders should be suspicious that a possible turn in the unemployment rate is imminent, and position their trades accordingly.
For example, there are two sharp declines on the HWI chart, which began in early 1989 and early 2000 respectively. As you can see, both sharp declines in the HWI were accompanied by sharp increases in the unemployment rate. In fact the HWI declines came one or two months ahead. This slight lead, which is evident only sometimes, can be a great advantage to traders who pay close enough attention. Traders should view any significant turns in the HWI with caution, thereby protecting profitable positions from declines caused by a later increase in the unemployment rate.
Today perhaps the most useful feature of the HWI is its consistency since 1951. Because of the few changes to its design or makeup, the HWI provides uniform data that paints an accurate picture for economists and historians wishing to research past labor conditions. For instance, looking over the history of the HWI, economist Katharine G. Abraham concluded that the job-matching process hit a patch of inefficiency between the 1960s and the early 1980s ("Brookings Papers on Economic Activity",1987). Two other economists, Hoyt Bleakley and Jeffrey C. Fuhrer, found that job-matching became more efficient during the late 1980s and early 1990s (New England Economic Review, 1997).
For traders the HWI's value lies in its illustration of job market conditions. Traders should be on the lookout for any indication of slack in this market. A high reading on the HWI means there is a demand for (or lack of) skilled workers, in which case many companies have to offer better wages to attract qualified candidates. If too many qualified candidates go un-hired and the HWI remains at long-term highs, it signals an inability in companies to find qualified workers. Periods of such job market inefficiency can cause a decline in productivity and competitiveness. And astute traders who are aware of the job market's current mode can position themselves ahead of a slowdown in productivity coupled with an increase in inflation and interest rates. In such conditions, both stocks and bonds suffer, so, by keeping an eye on the HWI, traders can know when there's a need to protect their long positions.
However, since it measures job demand only indirectly, keep in mind that the HWI is subject to quite a few anomalies and shortcomings. For example, many of the help-wanted ads published in the newspaper are placed by companies who are looking not to fill job openings but simply to build a collection of résumés. Other listings may be for multiple openings. In the 1960s and 1970s, equal-opportunity employment laws raised the requirement for job listings and increased help-wanted ads significantly. However, it is also true that office jobs are more likely to be listed than physical-labor jobs.
Finally, reductions in regions' newspapers over the years have lead to a consolidation of ads in the representative publications of the HWI. Abraham suspected that this anomaly resulted in a 1% annual drift upward between 1960 and 1985. But since 1985, the mass migration to the internet has likely resulted in downward pressure on the HWI, as employers look to fill positions via online headhunters and listings sites instead of print media.
JOLTS: An Alternative to HWI
In 2000, the BLS developed JOLTS, an economic data series that more accurately measures job vacancies. JOLTS samples 16,000 employers nationwide from roughly seven million possible establishments. In the survey employers report their monthly job openings, new hires and separations. Participants are randomly selected and usually participate for at least 18 months.
The chief drawback to JOLTS is that it has only a brief history, and therefore cannot be used to research and locate historical inefficiencies in the job market. It can however be used to benchmark what a more accurate HWI might look like, and that's just what some economists in San Francisco have done.
In their Economic Letter issued Jan 21, 2005, the Federal Reserve Bank of San Francisco (FRBSF) suggested some adjustments for making the HWI more accurate. First, the FRBSF smooths the HWI, using an Hodrick-Prescott (HP) filter, which is a technique commonly applied to economic data series to remove the spikes and short-term cyclical moves and to define a long-term trendline. Second, according the FRBSF's January Economic Letter, "HWI is detrended using an HP filter and adjusted so that its mean equals the mean of the actual series".
As you can see in the figure above - taken from the Jan 21st newsletter - with the FRSBSF's adjustments, the HWI takes on the same characteristics of the JOLTS survey, resolving the shortcomings of both series. As economists around the country comb through the HWI using this new technique, traders should expect to learn more from the FRSBSF's adjustments relating to what HWI readings indicate about dangerous levels of job-market inefficiency.
Because a strong and healthy job market is integral to the growth of a consumer-driven economy, keeping a close eye on the employment situation can pay off for watchful traders. The Conference Board's Help-Wanted Index provides traders with insight into the state of the job market. Long-term highs in the HWI are especially important as they imply an inability for companies to find qualified workers, which in turn can roil the markets.
Some shortcomings have hindered the usefulness of the HWI, but these may be resolved with new information and insight into the workings of the employment process. The JOLT sample, for instance, may provide a benchmark for HWI's accuracy. It pays to stay alert and current, so traders are wise to be watching for and learning from the latest research not only that of the CB but also of other economic resources.
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