Handicapping the Jobs Report

Jobs Sinking

By Jason Van Steenwyk

This Thursday packs a one-two punch of big economic indicator releases: The Jobless Claims report and the corporate profit report are coming out on the same day. What will that mean for traders?

Well, some of the suspense got taken out of the release last week when the Federal Reserve showed its hand: The current accommodative monetary policy (printing) must continue for the time being, because of the weakness of the economy. So the Federal Reserve is unlikely to change its course now even if the jobs report comes out smelling like a rose. But it won’t.

Early indications, looking at state-level releases earlier in the month, are that the economy continues to create jobs at a level insufficient to keep up with population growth.

North Carolina released its data on the 21st, and it was ugly.

So was California’s. Furthermore, California has some technical issues that could skew this week’s report in unpredictable ways. California’s a big enough state that a data glitch can throw off the numbers for the whole country. Nevada’s got some issues with reporting its numbers, too. True, the last few results have come in a bit better than expectations. But until the data issues coming from volatile California and Nevada get ironed out, they don’t really indicate much.

Furthermore, reading employment figures is no longer a case of just looking at the U-3 unemployment report, which does not count the hundreds of thousands of Americans who have given up looking for work. Now we’re keeping careful tabs on supplementary employment data, such as the U-6 report (13.7 percent as of August), the labor force participation rate, and the ratio of full-time to part-time jobs created… all of which have been dismal, and all of which have combined to influence the Federal Reserve to keep the punchbowl flowing with accommodative monetary policy.

Jobs Chart

FREEFALL: The Labor Force Participation Rate has been falling since 2008. Source: Bureau of Labor Statistics

The fact that the Fed has already indicated its longer-term course of action should keep a lid on volatility based on speculation about what the Fed will do in response.

Looking at the corporate earnings report due out the same day, we see a similar dynamic. Normally a very strong corporate earnings report would be a strong point in favor of monetary tightening – and in today’s environment, bullish for the dollar, because it gives the Fed a chance to flex its muscles and demonstrate some resolve to tame inflationary pressures.

But over the last couple of years, we’ve already had resurgence in corporate earnings – but no commensurate increase in employment. The Affordable Care Act has been a massive wet blanket on the labor market, and the Fed has been reluctant to yank the monetary chain with the employment market so fragile.

Our expectation is that the Fed will continue to be reluctant, even if the corporate earnings report is stronger than expectations. The Fed is more likely to prefer to maintain the course they expressed last week of continued monetary expansion, keep some stability in the markets, and try to encourage businesses to invest some of those profits in hiring and/or capital investment. With Janet Yellen waiting in the wings as the likely next Fed chair, we’re not expecting the Central Bank to rock the boat so soon after saying they wouldn’t.

That means no likely spurts of strength for the dollar any time soon, and some potential for declines against other stores of value.

Forecast: Meh.

 

 

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