How Jobs Drive the Dow

Ever since the financial crisis four years ago, jobs have been the central focus of millions of Americans. That’s why every month, investors pay a lot of attention to the latest figures on non-farm payrolls for clues as to whether a true recovery has taken hold. Until unemployment rates drop, and new job creation strengthens, many will argue that improvements in other sectors of the economy aren’t truly representative of what Main Street Americans face.

Obviously, market-moving news like employment figures has a big impact on the Dow Jones Industrials (INDEX: ^DJI  ) . But because many of the 30 Dow components are also major employers, jobs figures tell us something about the health of the Dow’s individual companies, as well. But it’s important to realize that the headline number doesn’t tell you everything you need to know about the conditions that the Dow’s members face.

By itself, the headline jobs number doesn’t include information on what kind of jobs the economy is creating at any given time. As a result, regardless of whether numbers are strong or weak, they can be misleading. For instance, Dow components McDonald’s (NYSE: MCD  ) and Wal-Mart (NYSE: WMT  ) together account for more than 2.6 million employees. Yet, many of those employees have relatively low-paying jobs and, in some cases, they represent underemployed individuals who aren’t able to use their full skill set at those companies.

By contrast, IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) are also big employers, with more than 750,000 employees combined. When those jobs disappear, as they have in HP’s case lately, they can have a bigger economic impact. Because many of those jobs involve skilled workers with specialized knowledge, it’s harder for them to get comparable work elsewhere, and their wages are often significantly higher than many jobs pay. The cascading impact of high-paying job losses affects the businesses that rely on those workers, as well.

Take a closer look
When tomorrow’s jobs report comes out, make sure to look beyond the headline numbers to get a sense of where job gains and losses are coming from. Doing so will give you hints about which parts of the economy are doing best, and which face the biggest threats.

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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of IBM and McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's and creating a synthetic long position in IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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