Why the Jobs Report Matters to Investors: What to Look for in Jobs Numbers

You’ve probably heard people call it by different names—the employment report, the jobs report, nonfarm payrolls—but they all refer to the same colossal report: the Employment Situation.

Released monthly by the U.S. Bureau of Labor Statistics—a division of the Department of Labor—the Employment Situation is the nation’s largest and most detailed compilation of employment data available (minus farming jobs). The most important thing the report tracks is the number of jobs created in the United States each month.

For many years leading up to the COVID-19 pandemic that began in 2020, jobs reports were pretty steady affairs. Jobs numbers generally grew around 180,000 to 200,000 a month as the economy gained strength following the 2008 financial crisis. There were hiccups here and there, but they often didn’t last long in the late 2010s.

Then COVID-19 upended the steady flow of jobs creation with mass layoffs in March and April 2020 that took jobs numbers down dramatically. That was followed by a huge gain in jobs creation as the pandemic eased over the summer before more layoffs hit later in the year. All the turbulence took a toll on certain industries more than others. For instance, almost 500,000 people in the leisure and hospitality industries (think restaurants and hotels) lost their jobs as the economy went back into lockdown in December 2020. 

Those are the kinds of trends the U.S. jobs report can tell investors about, but it goes much deeper than that. Once you’re familiar with the how the report works, you can use it to better understand wages, hours worked, where jobs growth is occurring and where it’s not, and much more.

What Is the Jobs Report?

In a nutshell, the Employment Situation report aims to lay out a comprehensive picture of the previous month’s state of employment in the United States, namely:

• How many people are working now
• How many people are looking for work
• How much people are getting paid
• How many hours people are working

The jobs report consists of two separate reports: an establishment survey that tracks approximately 697,000 work sites for nonfarm payrolls, work hours, and wage data; and a survey of households of approximately 60,000, presenting data on unemployment and unincorporated self-employment.

Now, imagine taking all this information and breaking it down across multiple demographics. It’s a lot—perhaps too much—to digest. And that’s why many investors are content reading the summary that accompanies each report. But if you’re looking for industry-specific info, you can often find useful nuggets deep in the survey. It’s all there at bls.gov.

What Makes the Jobs Report So Important?

When it comes to economic reports that sometimes move markets, the jobs report arguably holds a lot of weight. Minus U.S. farming jobs (11%, according to the U.S. Department of Agriculture), this report covers 89% of the jobs that drive the entire economy. In addition to providing recent data on employment across nearly all sectors of the U.S. economy, the report can also be used to forecast potential trends in other aspects of the economy.

What to Look for in the Jobs Report

The Employment Situation typically summarizes jobs data according to five main categories:

The nonfarm payrolls number represents the total number of full- and part-time workers in every U.S. sector and industry, minus farming jobs.

When private payrolls are highlighted, all government jobs are excluded; when manufacturing payrolls are highlighted, it refers only to manufacturing jobs.

The unemployment rate tells you the percentage of unemployed people in the labor force. Keep in mind, the unemployment rate counts only people who are actively looking for jobs.

Average hourly earnings shows you how much U.S. workers are getting paid.

The average workweek figure represents the number of hours people worked over a week.

The participation rate tells you the percentage of people who are either working or looking for work. Because it also represents the percentage of people who are not working, it can help you better understand the unemployment rate.

Slicing and Dicing the Numbers

Many traders surf the jobs report each month. They pay close attention to the numbers, waiting to see if the “actual” numbers miss or beat the “consensus” figures. But aside from trading major surprises in the employment figures, how might you use the jobs report to make longer-term portfolio decisions?

According to Alex Coffey, senior specialist, trader group at TD Ameritrade, the jobs report can help you determine aggregate wage growth. “For example, market participants like to use average hourly earnings growth and the length of the average workweek to gauge what the aggregate wage growth was for the month,” he said. “This is important because it can help forecast the health of the consumer—which drives roughly two-thirds of the U.S. economy.”

Plus, some of the granular, job-category-specific data from the establishment survey can help investors analyze the health of certain sectors. For example, the survey tracks employment changes in residential and commercial building construction, mining, and several categories of retail employment, among others.

“Specific sector data is used to help forecast the health of companies in an industry,” Coffey explained. He added that such data can also offer clues to other key economic indicators. “For example, the number of manufacturing jobs from the establishment survey is used to help forecast durable goods data.”

It’s important to remember, though, that one month’s set of numbers doesn’t constitute a trend. It’s best to consider each data point in the context of trends across time to get a more complete picture. If you’re looking at the new jobs report on the first Friday of the month and see something interesting, you might want to check jobs data from the previous few months to see if it’s part of a trend or maybe a one-time event.

Bullish, Bearish, or Somewhere in Between?

Suppose the Employment Situation data is about to be released and you’ve read up on the analyst consensus reports. How might the market react to a solid (or not-so-solid) set of numbers?

Before we get into a basic bullish/bearish interpretation, first realize that the economy is not a washing machine. It’s cyclical but not mechanical, meaning it’s not always predictable.

An expanding economy often coincides with a healthy labor market. Rising jobs numbers and a declining unemployment rate can mean there are more workers in the economy to spend money on goods and services. If the average workweek numbers trend up, it can indicate production gains, which, in turn, can signal the need for companies to hire more workers. If companies are able to ramp up their production, then they may increase wages without having to increase their product prices.

There’s a flip side to this, of course, and you might see it in an expanding yet maturing economic cycle.

Although a healthy labor market indicates economic growth and supports corporate earnings, it can also mean the economy is “overheating.” If employment grows too rapidly in a maturing economy, it can create a situation in which the production of goods may not be enough to keep up with consumer demand—a formula for inflation (more money chasing fewer goods). If wages rise while production slows (or can’t keep up with demand), then wage pressures may begin hurting companies’ profit margins, forcing them to increase product prices. If the prices of goods begin to rise too quickly, the Federal Reserve may counter these inflationary pressures by raising interest rates. This can potentially slow the economy, marking the end of a bull market and ushering in a recession.

When the economy is in a recession, typically you’d see an increase in the unemployment rate (meaning a decrease in jobs growth), along with a decrease in the average hourly workweek and possibly even wages. But at a certain point, these factors, particularly unemployment, may drive the Federal Reserve to begin slashing interest rates to boost the economy. A decrease in interest rates means that businesses can borrow money at a cheaper rate, allowing them to invest in infrastructure and begin hiring. On a larger scale, this can kick-start an economic expansion, beginning another bull market cycle.

Trading the Jobs Report

Anyone who trades fundamentals might find the jobs report handy to watch. This could be true if you’re trading commodities because, for instance, employment can help determine consumer and business demand for metals. It could also be true if you’re trading stocks. For example, if you’re considering buying shares of a restaurant or hotel, the report can give you insight into how much that sector is growing or shrinking.

You can even consider the jobs report in terms of options trading strategies. For instance, jobs data can give insight into whether an interest rate hike might be more likely—possibly with the potential to hurt the market. In that case, for instance, maybe you’d think about buying some puts or executing a covered call. 

Another way to prepare for the release of the jobs report is by potentially trading options on volatility-based products, including the Cboe Volatility Index (VIX).

If either the unemployment reading or some other aspect of the report disappoints, volatility will likely rise as equity markets sell off. And if that’s the case, VIX call options can rise, making ownership of these calls a means of limited, short-term protection against a falling stock market.

Bottom Line: Critical and Comprehensive, but Not Always Clear

The monthly jobs report provides a comprehensive overview of the nation’s labor market. It’s notable for its potential to move markets in the short and long term.

As a forecasting tool, however, the meaning of the numbers and what they potentially indicate for the future of the markets may not always be clear. Remember, the economy isn’t a mechanical gadget. In general, employment trends from the monthly jobs report can help you strategically position your portfolio. Just remember that interpreting this report can sometimes be a blend of art and science.