A labor report which will be released this Friday is expected to show that the U.S. economy is adding jobs faster and that the unemployment rate is falling. This is due to the nation’s businesses recovery from the COVID-19 pandemic recession and the easing of structural impediments in the labor market.
Tradingeconomics.com estimates that the U.S. economy added 900,000 jobs in July, up from 850,000 in June, with the unemployment rate falling to 5.8 percent in July from 5.9 percent in June.
How the U.S. Bureau of Labor Statistics (BLS) Measures Job Growth
BLS measures job growth through the establishment survey, which provides statistics on employees’ employment, hours, and earnings on nonfarm payrolls. It collects this data each month from the payroll records of a sample of 144,000 businesses and government agencies.
Job growth is inversely related to the unemployment rate. BLS measures unemployment separately, through the household survey, a sample survey of about 60,000 eligible households, which provides information on the labor force, employment, and unemployment.
When taken together, the two surveys give the “employment situation” of the U.S. economy for the month they are conducted. They are published the first Friday of the following month.
Job Growth Since the End of the Covid-19 Recession
After taking a big hit during the COVID-19 recession back in the middle of 2020, the U.S. job growth has been recovering. Yet, the recovery has been slow and uneven due to structural impediments in the labor market, which create the paradox of high unemployment co-existing with labor shortages. One of these impediments is the U.S.’s generous unemployment compensation programs, which make it more gainful for some workers to stay home and collect unemployment than to get back to work.
Then there are ongoing child care responsibilities and health concerns that may discourage some workers from finding a job.
In June, for instance, the U.S. economy added 850K jobs, the most robust job growth in 10 months, ahead of forecasts. Most job gains occurred in leisure and hospitality (343K) as pandemic-related restrictions continued to ease across the nation; public (230K) and private education (39K); professional and business services (72K); retail trade (67K), and other services (56K). Nonetheless, nonfarm payroll employment is down by 6.8 million, or 4.4 percent, from its pre-pandemic level in February 2020.
Job Growth is Key for Wall Street
The Federal Reserve closely follows the jobs report, as it tries to determine the “slack” in the labor market. That’s a key metric the nation’s central bank deploys to determine how close or how far the U.S. economy is from its dual mandate of full employment and stable prices.
Simply put, the slack in the labor market sets the pace for monetary policy in its FOMC meetings, which are held every five weeks. It’s an event Wall Street monitors closely to determine the direction of interest rates.
A high slack in the labor market (weak job growth) is an indication that the U.S. economy is operating below the Fed’s target of full employment. That means there’s plenty of room for accommodation (monetary easing), or taking actions to stimulate the economy, without the risk of such policy pushing inflation above the Fed’s target of 2%.
By contrast, low slack in the labor market (high job growth) is an indication that the U.S. economy is overheating. In that case, it runs the risk of exceeding the Fed’s inflation target, meaning that the Fed must reverse course and tighten monetary policy.
For Wall Street, job reports are essential for another reason: they indicate income growth, which determines consumer spending. Inevitably, consumer spending ends up in the top lines of companies that serve the American consumer.
That’s why the return to job growth is a mixed blessing for equity markets. On the one hand, job growth is a boon to household income and spending, eventually translating to higher earnings and equity prices.
On the other hand, job growth can fuel inflation and higher interest rates, translating into lower equity prices.
Importantly, rising inflation and interest rates have already appeared in Wall Street headlines in recent months, pushing bond yields higher.
While it’s still unclear how long the inflationary pressures will last, one thing is clear: Wall Street will cast a wary eye on inflation as the U.S. economy heads to full employment.
Summary and Conclusions
An update on the July employment situation, which will be published this Friday, will provide traders and investors with the opportunity to determine the state of the U.S. economy as it strives to get back to normal. It will simultaneously give them a glimpse into the Fed’s next policy move.
A strong employment report will be both a good thing and a bad thing. It will be a good thing as it will help listed companies grow their top lines, but the flip side is that it will re-ignite inflation fears and the possibility for higher interest rates.