Last week the monthly employment report came out, and in typical fashion it had an impact on the financial markets.
In addition this report is important for people working, or seeking employment, to get a sense of what their job prospects might be.
One point of confusion for some is that there are times when the unemployment rate drops, yet the perception is that the economy has weakened. This happened in last Friday’s report when the unemployment rate dropped from 7.7 percent to 7.6 percent.
The employment report that comes out is based on two surveys, one of households and one for businesses. The business survey is more comprehensive, so that is the figure commonly used to report the number of jobs created in a given month.
The March figure showed an increase of 88,000, which was considered a disappointment.
The household survey asks individuals whether they are working, and if not are they actively looking for employment.
In March according to this survey there were 206,000 less people working, but the labor force contracted by 496,000, thus resulting in a drop in the unemployment rate. The household survey tends to be quite volatile month to month, which is why the financial markets focus more on the business survey.
While the business report is the more reliable one, it is subject to significant revisions. For example since 1996 the final monthly revised figure has differed by 73,000 from the initial report.
In addition there are seasonal adjustments made each month, which can cause further distortions.
In our economy there are over 130 million people employed, so if the initial estimate is off by 100,000 from consensus figures, as March’s report was that is less than 0.1 percent.
This is not to imply that the monthly report is without value, but that several months data are needed to detect a meaningful trend.
Taking a longer term look at the monthly employment data I believe some conclusions can be made. Job growth for 2013 most likely will be rather similar to 2012, probably averaging around 150,000 jobs per month.
This should allow the unemployment rate to continue to decline modestly, though there will be some months that it may spike up due to typical variability.
Year over year salary changes have been averaging about 2 percent, which is roughly the rate of inflation.
However, the employer cost has been increasing closer to 3 percent due to rising health care premiums. Nonetheless, corporate profits have been expanding due to productivity gains.
In time wage rates will likely start to increase at a greater rate, but the unemployment rate will have to continue to drop.
Certainly those who are in industries that are exhibiting strong growth should be able to enjoy relatively faster wage gains.
For most people it is useful to pay attention to the monthly employment data, but don’t read too much into one month’s report. You would need to see a significant shift over a period of time before there is a meaningful change in the employment outlook.
My best guess is that the employment situation has not changed in an appreciable manner, but wage gains might pick up in a year’s time.
For the investor this period of slow wage growth has been good for corporate earnings. Profits as a percent of sales are near a historical high.
Future earnings growth will likely be more dependent upon revenues increasing, rather than profit margins expanding further.
While the market did perceive the March employment report as disappointing, I believe we need several more months of data to draw any conclusions. Therefore, I would not make any investment changes based on this information.
