Last Friday the US Labor Department released new employment estimates for the month of August. According to the new numbers, the US economy created 173,000 jobs in August, and the unemployment rate dropped to 5.1%, the lowest rate since 2008.
You might expect the stock market to react well to further signs of strength in the economy. However, the opposite happened. The Dow Jones Industrial Average fell 272 points, or 1.7%, to 16,102 on the news. The S&P 500 lost 1.5%, and the Nasdaq Composite dropped 1.1% on Friday. How is it that the stock market drops when seemingly good economic news comes out? It’s because the US economy is extremely complex and interrelated in unexpected ways.
There are many important indicators of economic strength. At the national level, analysts follow interest rates, the gross domestic product, and inflation, to name a few. However, employment remains one of the top signs of how an economy is doing. The Federal Reserve watches job growth and the unemployment rate very carefully. This data can move markets and impact the political fortunes of elected officials.
On the first Friday of every month, the Bureau of Labor Statistics releases its estimate of how many jobs were created in the previous month. This estimate is based on a survey of approximately 143,000 businesses and government agencies, representing approximately 588,000 individual worksites. The survey enables analysts to provide detailed estimates on the number of jobs, hours worked, and earnings of workers.
One of the areas not covered by the employment numbers, however, is farm workers. The difficulty of collecting accurate information on farm employment is generally too much to overcome. Thus, the report focuses on “nonfarm payroll employment.”
The release of state-level employment data comes out a couple of weeks after the publication of national employment data. The data are very closely related, and state labor departments work with their federal counterparts to provide the best information.
In addition to the total number of jobs added or lost in a period, the government also releases estimates of the number of people who are unemployed at any given point in time. This number is developed by comparing the number of people employed to the total size of the labor force (the number of people who would like to work) at any given point in time.
The unemployment rate can fluctuate based on a variety of factors. Unemployment should increase when the economy is contracting, and it should decrease when the economy is expanding. However, several times this year the economy has created jobs only to see the unemployment rate either remain the same or increase. How can this happen?
Returning to the Workforce
In addition to the number of people employed and the number of persons unemployed, there are even more people who are watching and waiting. As an economy improves, people come off the sidelines. Those who may have given up looking for work, or who decided to pursue other ventures rather than being in the labor force, begin to rejoin the job market. This could be full-time students or stay at home parents. As these individuals re-enter the labor market, they impact the unemployment rate and can cause stickiness in the indicator.
Eventually, as the economy continues to improve, the unemployment rate will reach what economists call, a “natural rate.” This term can be confusing and frustrating to many. Why shouldn’t we strive to have zero unemployment? This is because there are always people moving from one job to another, whether due to new opportunities or changes in workforce needs. While it may be difficult for employers or for individuals to go through employment changes, it is essential to ensure the long-term health of an economy.
The employment situation in the US is one component of a dynamic and sophisticated economic machine, connecting labor supply with labor demand. By tracking its movements, it becomes apparent that the free market is alive and well in the United States.
Returning back to the employment release on Friday and the negative market reaction - what we saw was equity markets that are very concerned about what the Federal Reserve will do with interest rates when the Federal Open Market Committee meets later this month. The relatively strong employment estimate showed an economy that is better prepared to handle an increase in interest rates. Therefore, the chances of the Fed increasing interest rates went up on Friday because of the good employment estimates. While it may be good for the economy to have employment growth, it is not good for the stock market to have interest rates going up. People will be less inclined to put money in stock markets if they can make money in other ways. It appears that even traders are increasingly expecting an interest rate increase later this month.