Why is employment so important?

Every month, on the first Friday of the month, the US Department of Labor publishes data on the level of employment and the number of people employed in non-agricultural sectors. Why is this so important?

First, high unemployment leads to social tensions, which, ultimately, can lead to unrest and to the seizure of power by force. High unemployment contributes to the coming to power of various radical politicians. The most striking historical example of this was Germany during  the time of A. Hitler.

Secondly, it is the effect of unemployment on production and, as a result, on economic growth (GDP growth).

Thirdly, unemployment reduces tax revenues to the budget and increases government spending, including, for example, on unemployment benefits and social obligations.

In the United States, the unemployment rate is calculated together with the number of people employed in the non-agricultural sector. We will discuss how the calculations are made and what you need to pay attention to in order to analyze the situation with the unemployment rate and on the financial markets.

Unemployment Rate in the USA

The unemployment rate is calculated through surveys by the Ministry of Labor of about 60,000 families. People who work in agriculture and in the extra-agricultural sector are interviewed. After that, the calculation is made according to the following simple formula.

Unemployment rate = (Number of unemployed) / (Labor force) * 100%

Economists agree that a normal level of unemployment can be considered 4-5%.

Unemployment Rate in the USA

As you can see, in the United States since the end of the mortgage crisis, the unemployment rate continued to decline and reached its historic low in May 2019 (3.6%).

Here it is necessary to take into account that the United States Department of Labor refers only to those people who are actively engaged in job searches as “unemployed”. People who do not have the opportunity to change their position and become employed are not taken into account in the unemployment rate.

Non-Farm Payrolls

Non-Farm Payrolls (NFP) or the number of people employed in the non-farm sector is also calculated through surveys. However, this time around 400,000 companies are surveyed, employing about 40 million people. This data shows economists how many people are employed in enterprises and weather that number has increased or decreased.

What number of NFP is considered “normal”? Of course, the general criterion is the following: the more, the better. More labor – stronger economic growth, but, unfortunately, this often leads to an increase in inflation. But more about that another time. According to various estimates of economists with a normal growth of the American economy (3-4% per year), the number of jobs created should be at least 150,000 per month.

If you pay attention to the NFP indicator, you can see how strongly the crisis years affected the results of employment (the indicator was negative).

Unemployment Rate in the USA

What else is published together with the unemployment rate and the NFP?

The American economy is very complex and “rich” in various statistics. Together with the unemployment rate and the number of people employed outside agriculture, a number of other indicators are published, which are highly desirable to pay attention to.

If you do not take into account the calculation of various indicators of NFP for different groups (for example, NFP for civil servants and NFP for the private sector), the most significant indicators are the average hourly earnings, the average weekly hours and participation rate.

The growth of average hourly earnings leads to an increase in consumer spending, and this is an increase in consumption and, as a consequence, growth in the economy. Consequently, this indicator can sometimes have a significant impact on the market situation, even if the Non-Farm Payrolls itself came out at the level of the predicted value.

The average weekly hours, as the name implies, estimates how many hours workers on average work during the week. An increase in the average weekly hours is considered an indicator of economic growth, while a decrease is likely to lead to corporate reductions.

The participation rate reflects the number of people who have or want to have a source of livelihood. In fact, these are people aged about 15 to 70 years old, who may be both working and unemployed. Consequently, the growth of the economically active population, of course, is beneficial for the economy.

As you can see over the past few years, the number of economically active population continues to remain stable – above 60%.

the number of economically active population

What to look for in order to determine the accuracy of the NFP forecast and the unemployment rate?

Of course, even before the unemployment rate and Non-Farm Payrolls are published, there is a block of unemployment statistics in the United States that affects the consensus forecast. In this article we will try to explain what is necessary to pay attention in order to understand how the consensus forecast is used.

  1. The number of applications for unemployment benefits and the number of secondary applications for benefits (published every Thursday; data are collected for the week)

Assessment: the greater the number of applications for unemployment benefits, the worse the employment situation. Therefore, in the case of an increase in the number of applications for the month, one can hardly expect a positive indicator on unemployment.

  1. Job cuts

Assessment: the more people reduce, the greater the unemployment rate. A lot of layoffs in the economy has obvious results. However, unfortunately, it is very difficult to estimate the quantities of people to be reduced as considered “normal” and which number is “above the norm”. We suggest to monitor the “surge” indicator. If there is a significant number of downsized employees, then we can say that the unemployment rate can hardly go “into decline”.

  1. Conference Board Help Wanted OnLine (HWOL)

Assessment: The higher the vacancy rate is, the lower the unemployment rate. It seems logical to track the indicator over time. The fact is that the growth in the level of vacancies does not immediately affect unemployment. Interview and admission procedures take a certain amount of time (one to two months).

  1. ADP Non-farm payrolls

Assessment: this is perhaps one of the most controversial indicators, which almost always raises a lot of questions. Prior to the publication of the very indicator of employment in the non-farm sector, a day before the publication (on Wednesday), a preliminary assessment is made by the organization Automatic Data Processing Inc. (ADP). The report is based on an assessment of about 340 thousand companies and 21 million employees. Unfortunately, the ADP report and the US Department of Labor often do not match.

Top – the change in the actual level of NFP according to the Ministry of Labor, the bottom – ADP

Thus, when assessing the actual NFP indicator, it is necessary to consider the possibility of a significant deviation from the data on ADP.

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