Wednesday, November 7, 2007

Importance of US Job Data Report

The US job report is most eagerly awaited by stock market investors as it is the first economic indicator that covers the month just ended. Any weak number may cause weak consumer spending and lead to poorer stock market performance.

IN THIS article, we will look at the US Employment Situation Report, which we sometimes call the US job report. It is the most eagerly awaited economic indicator as it is the first US economic indicator that covers the month just concluded.

It is published very quickly in the first Friday of the following month. For example, the US job data which was released last Friday (Nov 2) was for October. As it is released ahead of all other economic indicators, it provides the latest health check on the US economy.

The US Employment Situation Report is published by the Bureau of Labour Statistics of the US Department of Labour. It includes the monthly change in non-farm employment, the trend in hours worked, the level of hourly and weekly earnings, the part-time employment level and the level of temporary workers.

This report also includes levels of employment and unemployment broken down by gender, ethnicity, age and marital status. Besides, it shows levels of employment by sector, average hours worked as well as earnings.

This report provides the latest situation in the US job market and household earnings. Normally, if this indicator shows weak numbers, in most instances, subsequent US economic indicators would also not be good.

Hence, it has very high market sensitivity as wages and salaries from employment account for the main source of household income. Any unexpected changes in the information can have a huge influence on the stock market's movement.

Personal income is the main driver of consumer spending. It is mainly derived from wages and salaries that are reported in the US Employment Situation Report.

As consumer spending is the largest sector in the economy, a higher set of numbers in wages and salaries may imply better consumer spending in the near future. Higher demand for products will cause manufacturers to increase their inventories build up.

This will lead to higher capital spending to support higher activities in manufacturing. Coupled with better profit margins, higher corporate profits will contribute to better stock market performance. In short, the stock market is closely tied to consumer spending, where wages and salaries are the primary determinants of the latter.

On the other hand, lower employment numbers or a higher unemployment number will cause lower consumer spending as well as slower growth in corporate businesses.

Usually, it will precede an economic downturn as employers try to anticipate a recession by reducing headcount. Hence, any reduction in growth rates on consumer spending may sometimes imply the beginning of a bear market.

In the US job report, the best measurement of individuals’ unit purchasing power through wages and salaries is the average hourly earnings series.

In most instances, the real hourly wage will decline before consumer spending growth peaks as a result of rising inflation caused by strong consumer spending itself.

According to Joseph H. Ellis in his book entitled Ahead of the Curve, real hourly earnings are an effective leading indicator of consumer spending. It serves as a useful leading indicator of the direction of the stock market. According to his research, real hourly wage begins to slow six to 12 months before the peak in consumer spending growth.

The number of jobs and earnings can provide useful data to economic forecasters. However, it is compiled from surveys that may not be 100% reliable. Besides, sometimes there may be some revisions in the figures of the previous months.

Nevertheless, given that stock prices are positively correlated with job creation, the investment community pays very close attention to the employment report on the first Friday of every month.

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