I was asked a very important question Friday morning by a very intelligent person: Why does Wall Street care about the employment report? This question inspired me to write this article because so many people simply do not understand how Wall Street works.
Jobs Report- What is it?
The first Friday of every month, the Labor Department releases its nonfarm payrolls report which illustrates how the labor market (and the broader economy) fared over the past 30 days. Bloomberg.com does a great job defining this report:
“The employment situation is a set of labor market indicators based on two separate surveys in this one report. Based on the Household Survey, the unemployment rate measures the number of unemployed as a percentage of the labor force. Other key series come from the Establishment Survey (of business establishments). Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation’s business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls.“
The monthly employment report is one of the most anticipated economic reports released each month because it gives investors a look on how all major sectors of the economy are performing. Furthermore, the report is released at the beginning of each month and is comprehensive in nature. The report looks at the health of the jobs market and shows what happened to income and productivity during the past 30 days. As a result, investors are able to get a good read on the economy from which they can draw their own conclusions on what other economic reports will look like for that month.
Why Does Wall Street Care?
The jobs report is extremely important, especially now, because in October 2009, the unemployment rate surged to a 26-year high of 10.2%! Over the past few months, the number of job losses have steadily declined as the unemployment rate edged higher. If this trend continues we can easily turn positive (i.e. start creating jobs) in the near future which will bode well for the economic recovery. That said, Wall Street watches this report very closely because a stronger jobs picture translates into a healthier economy. A healthier economy translates into stronger sales and earnings which, in turn, translates into higher stock prices. Sometimes, ladies and gentlemen, it is that simple.