2012-03-19 12:03:25
July 13 2009 | Filed Under Economics
On the first Friday of every month the U.S. Department of Labor's Bureau of Labor Statistics releases the Employment Situation Summary, otherwise known as the Employment or Jobs Report. Based on the Current Populations Survey (a household survey) and the Current Employment Statistics Survey (establishment survey), this report provides estimates of the number of people employed and unemployed, the number of hours being worked, and a myriad of other related facts and figures. Its information is widely anticipated, forecasted and used by Wall Street firms, their economists and many business decision makers. It may even have an impact on broader public and corporate confidence and therefore impact future business and hiring decisions. (Are you concerned about your job security? Read Planning For Unemployment.)
Read on to learn more about this report, and what it can tell you about the state of the economy - and your future job prospects.
What the Report Doesn't Say
The report is scrutinized for what it has to say about the state of the economy. The number of jobs being created can signify whether an economy is improving, overheating, or waning. Unfortunately, since the numbers often get significant revisions long after their initial release, the Employment Report is not so much predictive as it is a confirmation of economic conditions. Also, the numbers can have unexpected swings from month to month with predictions being way off target for many months in a row.
For example, in a post-recession scenario, new jobs created might come in far below what economists were forecasting. Then there might finally be a month in which three times as many jobs as expected show up, causing the Federal Reserve to raise interest rates. The next month, however, the report could bring in terribly low numbers, and the information from the business and household surveys could be increasingly divergent, compounding economists' exasperation over the report's lack of predictability.
Uncertainty aside, in relation to other employment and economic related indicators, the Employment Report does provide worthwhile information. In particular, unexpected results often indicate that something unusual is going on with the economy and employment.
What It Does Say
In the spring of 2004, for example, there was a large divergence between the household and establishment surveys. This divergence may have been caused by a rapid shift in the nature of employment, a shift to a reduced willingness from employers to hire permanent full-time workers. Several factors urged such a transition: an economy that was struggling for several years, new technology that made it possible for employees to work remotely, and increases in hiring efficiency that made it easier to find employees with specific skills. Before these changes, it was long common for employers to turn to temp agencies to meet lower-level staffing needs after an economic recession, but the trend moved toward employing people of all skill levels on a contract basis. These independent contractors are recognized by the household survey, but not by the establishment survey, so in the spring of 2004 the surveys partly created the illusion of a jobless economic recovery.
Who Uses the Employment Report?
The market that's most driven by the Employment Report is the currency market. This was shown by a 1995 study by the Federal Reserve Bank of New York, which noted several ways in which employment data impacted the currency market. An unanticipated rise in employment, for example, means a rise in the U.S. dollar. The study reported also that reactions to surprises are related to the implications on short-term interest rates. The currency market has become increasingly sensitive to the data and pays particular attention to the establishment survey. (For background reading on the employment report, see Economic Indicators To Know.)
But the interest in the Employment Report doesn't stop there. The bond market is concerned with what the report may indicate about inflation and interest rates. A strong employment report may indicate an economy that is heating up too quickly and lead economists and traders to become concerned about inflationary pressure. However, it can also raise concerns about tighter monetary policy and forthcoming interest rate increases. The equity market looks for rising employment as a sign of corporate optimism and growth potential. It is also concerned with inflation and interest rates, but to a lesser degree.
The Surveys
The names of the two employment surveys indicate the facets of the population that they cover. The household survey interviews 60,000 households, while the establishment survey gathers data from 160,000 businesses and government agencies covering 400,000 work sites, or about one-third of all payroll workers. While the Employment Report is released on a monthly basis, the surveys actually cover only a single week that includes the 12th day of the month.
Both surveys have their merits and drawbacks. The household survey includes just about every kind of employed person, including self-employed persons, agricultural workers and even those who work in the home raising a family. The establishment survey includes only employees of companies that provide payroll counts. So even though its survey sample is large, the establishment survey misses a significant demographic and can really misrepresent the rate of employment when the number of self-employed persons hits extremes. The household survey, however, covers only 60,000 people and is often criticized for being volatile due to the relatively small sample size.
The Business Cycle and Divergent Surveys
The number of self-employed persons can fluctuate significantly throughout the business cycle. Recession, layoffs and tight labor markets can drive many people to go into business for themselves. Many skilled laborers become consultants, and it's not uncommon for people to consult with their former employers. These people are often unaccounted for in the establishment survey, and a move in this direction tends to exaggerate the unemployment rate. (For relate reading, see 10 Tax Benefits For The Self-Employed.)
Conversely, when the economy begins to accelerate and companies start hiring again, many self-employed persons decide to go back on the payrolls for the steady paychecks and benefits. At such times, the divergence between the household and establishment surveys could reverse.
Another factor that impacts the payroll survey and not the household survey is the rate of employee turnover. Every time someone changes jobs within the reporting period, they are counted twice: once by each employer. This goes on all the time, so it shouldn't greatly influence the change in employment numbers from month to month. However, over longer periods the turnover rate can vary throughout the business cycle. One theory is that turnover slows during the early part of economic recovery because workers are sensitive to layoffs and therefore want job security.
The Bureau of Labor Statistics attempts to respond to some of the criticisms by issuing new data. In 2004, the BLS introduce the Job Openings and Labor Turnover Survey (JOLTS). This lesser-known monthly release reports the number of hires, separations and job openings. It is released mid month, giving a preliminary on the previous month and a revised report on the month prior to that. In addition, in 2006 the BLS introduced the hours and earnings series for all employees as a supplement to existing nonsupervisory and production hours and earnings data.
Also introduced in 2004 was the Quarterly Services Survey put out by the U.S. Census Bureau. This survey provides statistics about the service industry, which is responsible for about 55% of the nation's economic activity.
Another survey is the Contingent and Alternative Employment Arrangements, which measures the number of self-employed persons. Unfortunately, it is released only every two years.
In 2009, the Current Population Survey (CPS) introduced new data on the employment status of individuals with disabilities.
The Survey Components
Both the establishment and household surveys consist of several components that feed into the Employment Report:
The Household Survey:
Unemployment: The number of unemployed persons and the unemployment rate.
Total employment and the Labor Force: The total number of people employed and the proportion of the population aged 16 and over that is working.
Persons Not in the Labor Force: The number of persons marginally attached to the labor force. These are people who want to work and have sought employment in the past 12 months, but not in the past four weeks. They are not counted as employed. This component also reports the number of discouraged workers who believe there is no work available for them.
The Establishment Survey:
Industry Payroll Employment: Total employment and specific employment sector employment statistics.
Weekly Hours: The average workweek for production and non-supervisor level employees, and the hours worked by those employed in manufacturing.
Hourly and Weekly Earnings: The average hourly and average weekly earnings of production and non-supervisor level employees.
Conclusion
While the Employment Report might be volatile and subject to major revisions well after the fact, it remains a widely watched indicator of economic well being. And the numbers it provides on employment influence the financial markets directly. The number of new jobs being created provides clues about the economy and corporate earnings and indirectly provides insight on interest rates and currency prices.
by Mark Mahorney