Jun 13, 2013

US Unemployment Report and its effect on Equities

Unemployment Report from BLS.gov

Each month, the Bureau of Labor Statistics (BLS) analyzes and publishes statistics on the labor force, employment, and unemployment, classified by a variety of demographic, social, and economic characteristics. These statistics are derived from the Current Population Survey (CPS), which is conducted by the Census Bureau for BLS. This monthly survey of the population uses a sample of households that is designed to represent the civilian noninstitutional population of the United States. (http://www.bls.gov/opub/hom/homch1_a.htm)

Current Population Survey, a sample of 60,000 households; data are collected by personal and telephone interviews. Basic labor force data are gathered monthly; data on special topics are gathered in periodic supplements. The Current Population Survey, a monthly household survey conducted by the Bureau of the Census for the Bureau of Labor Statistics, provides a comprehensive body of information on the employment and unemployment experience of the Nation's population, classified by age, sex, race, and a variety of other characteristics.

Current Population Survey, a sample of 60,000 households; data are collected by personal and telephone interviews. Basic labor force data are gathered monthly; data on special topics are gathered in periodic supplements.

There are 3 primary indicators to look for in the Unemployment report though only the Unemployment rate gets all the attention.

1. Unemployment rate = Number of Unemployed people / Labor force

2. Labor force participation rate = Labor force / working age population

3. Employment to Population ratio = Number of people employed / working age population

Where:
Labor force = Number of Unemployed people + Number of employed people
Working age population = number of people aged 16 years or more and can work

How important is Unemployment rate?

Unemployment report has a big influence on equities and hence we see 3 digit moves on Dow Jones Industrial average when the rates are announced on the first Friday of the month. Unemployment data is said to be lagging indicator, but if we compute a moving average of monthly Unemployment rate then we can see how influential the Unemployment data has on the equities. This is clearly indicated in the chart below.





The tricky thing with Unemployment rate is that it can change even without any change in Number of unemployed people. That is because the Labor force number can change as more (or fewer) number of people can start looking for jobs. To account for this we can compute a fourth ratio, Unemployment to Population ratio.

Unemployment to Population ratio = Number of Unemployed people / Working age population
= Unemployment rate x Labor for participation rate

The chart below shows the true change in Unemployment rate:






What influence does the monthly nonfarm payroll numbers have on equities?

Current Employment Statistics - CES (National)

The Current Employment Statistics (CES) program is a monthly survey conducted by the Bureau of Labor Statistics. The survey provides employment, hours, and earnings estimates based on payroll records of business establishments.

Each month the Current Employment Statistics (CES) program surveys about 145,000 businesses and government agencies, representing approximately 557,000 individual worksites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls.

The CES survey data provided the monthly nonfarm payroll data and this data has significant impact on equities too. To illustrate this point, the below chart shows S&P 500 against 12 month MA of nonfarm payroll data. See the correlation between the two data sets.




Unemployment data is a key indicator of the health of the economy and is capable of generating big moves on equities. Since all markets are inter-related the waves will be felt in other markets too.