Why The Jobs Report Is The Most & Least Important Economic Data Release

On Friday May 3, 2013, the U.S. Bureau of Labor Statistics (BLS) will release its monthly jobs report (also known as non-farm payroll, or NFP). We will be receiving the jobs data for April. If you’ve every followed any economic data release, you know that tomorrow’s number is the “Big Kahuna” and one that everybody freaks, frets, or rejoices over. However is the Jobs report what its all wrapped up to be? The answer to that is a little more complex. Here’s why the jobs report is the most & least important economic data release we have.

Least Important

A lot of people are obsessed with the number when its released. There are those who love to break it down and rip it inside out (either for a bullish or bearish spin). However, those who magnify the job report as the be-all & end-all of economic indicators are not doing everyone else justice. While the jobs report is important (will talk about this later), there are many reasons to not get sucked into the hype on one month’s data.

  1. The number gets revised! The number we hear tomorrow is very likely not going to be the final number we hear for April 2 months for now. I like to point to August 2011 when it was first reported that ZERO jobs were created. After 2 revisions, we saw that not only was that wrong, but it was totally off and we had actually created 132,000 jobs! I have been on “Team Revisions” for as long as I can remember (as in I care about revisions more than headline number).
  2. The number is likely inaccurate! The sampling error for a 90% confidence interval is +/- 100K.
  3. One month does not a trend make! This month might be super high or low, but what it is not is a trend. Until I do not see 3-4 consecutive (revised) months headed in the same way (improving/deteriorating/stabilizing/etc)
  4. It’s just one data-point! We get a ton of other data on the other days of the month. Even if this number is bad, it doesn’t mean the $MACRO outlook is bad.
  5. It doesn’t really mark major market turning points. The market trades at the levels of “NFP day” in the near/intermediate future. Just take a look at a chart of $SPY. Would you be able to tell which days the jobs report was released (without seeing the dates)? I marked them down in the chart below.

$SPY Daily

(with NFP days marked)

Most Important

Here’s why it can be the most important data release we have.

  1. The $FED is likely tracking job growth. So if they see tepid growth (or in good times, strong growth), they might be tempted to act. And it’s not that I believe the market is based only on the $FED, however, their decision still has an impact on markets.
  2. It could affect the economy. Given this is the headline number and probably the only economic number Americans hear/know about, so it could effect consumer/investor confidence. I don’t think this is too significant, but on the margin it could make a difference.
  3. Coinciding with other data. For example, ADP (the private payroll data) and NFP track each-other pretty well long-term. If they were to diverge, which would we think is correct? It would be hard to forecast data if other things didn’t confirm it. You would not expect 7% GDP growth if NFP was to average 125K/per month for the year. Again, this might not have a direct effect on markets, but it would make reading the economy harder just because jobs are such a big part of it. Any major divergence in the data could make forecasting hard.
  4. It moves markets! Contrary to point #5 above, NFP truly is a market mover. Here is an awesome chart from Jared Bernstein. As you see below, NFP, compared to other data releases, really moves the market short term. So if you are a shorter-term trader, you need to be aware of the importance of this release.

 

Conclusion

The Jobs report can be both important and inconsequential. Just like most things in life, we need to “moderate” our ‘intake’ of the importance of NFP. Yes, it’s important, but its not really the ultimate hay-maker for the markets. It’s best to pay attention to it, but not overplay the number (be it good or bad). And yes, I know that’s tough to do!

 

Tags: $MACRO $SPY $DJIA $SPX $DIA $IWM $FED

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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