Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why Today's Employment Numbers Will Stump the Fed

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Today's August employment report matters. Not only is it a key indicator of the health of the U.S. economy in its own right, but it's the most important data Federal Reserve policymakers will see before the September meeting of its monetary-policy committee, the Federal Open Market Committee. The consensus view is that the FOMC will decide to begin scaling back its $85 billion-per-month bond purchases.

The headline numbers look encouraging: The economy added 169,000 jobs in August, and the unemployment rate fell by 0.1 percentage points to 7.3%, the lowest rate since December 2008 (one year into the Great Recession). However, The Wall Street Journal's Phil Izzo does a good job of explaining why the unemployment rate dropped for the wrong reasons:

The drop in the main unemployment rate was driven almost totally by negative factors. The number of people employed fell by about 115,000. The only reason the rate declined is that the overall labor force dropped by a larger 312,000, a possible sign of discouraged long-term jobless dropping out.

The labor force participation rate, which is the percent of the population either working or looking to work, took a tumble to 63.2% -- its lowest level since 1978.

Equity investors appear to be giving the report the thumbs-down: The S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) are down 0.81% and 0.95%, respectively, as of 10:05 a.m. EDT.

The last time the unemployment rate was 7.3% and declining was in January 1993; at that time, the economy was recovering from the short-lived July 1990 to March 1990 recession. By the end of 1993, the jobless rate had fallen to 6.5%, which happens to be the threshold at which the Fed now says it will begin considering a rate hike. One year later, unemployment was down to 5.5%.

The 1990-1991 recession was a lot shorter and less traumatic than the Great Recession, which has been over for four years now, but the example may help to illustrate why the fixed-income investors appear to be pricing in rate increases on an accelerated calendar compared to the forward guidance the Fed has provided. Indeed, Fed funds futures prices now imply a first hike in October 2014, whereas the Fed policymakers have indicated they do not expect this to occur before 2015 -- even late 2015.

What does this mean for stocks? While recent economic data has been encouraging, today's employment report will not be what the Fed is looking for if it is seeking confirmation for a decision to taper its bond-buying program. Either way, investors should expect volatility in the short term; however, the longer-term outlook suggests the U.S. economy is continuing to heal, which is overwhelmingly positive for corporate earnings and thus stock prices.

The same longer-term outlook (and opportunity) holds abroad. With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2013, at 11:54 AM, PrintPrintPrint wrote:

    Another complete DISASTER of a jobs report. Not only were 85% of the jobs created this month the LOWEST PAYING jobs possible, the already abysmal print of 162k in July was revised downward to 104k! June was revised down as well! For the first time in American history, there are now 90.5 MILLION Americans out of the labor force.

    The jobs situation in this country is an absolutely tragedy, and is 100% proof that the Bernakes and Krugmans of this world need to be put out to pasture. Trillions upon trillions in fake money printed, and we have 90.5 MILLION Americans out of the labor force.

    How much longer do this madness need to continue? How much more must we print and destroy everyone who isn't a banker. WAKE UP PEOPLE NOW!!!!!!!!!!!!!!!

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2625582, ~/Articles/ArticleHandler.aspx, 8/25/2016 12:53:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 18,481.48 -65.82 -0.35%
S&P 500 2,175.44 -11.46 -0.52%
NASD 5,217.70 -42.38 -0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/24/2016 4:38 PM
^DJI $18481.48 Down -65.82 -0.35%
^GSPC $2175.44 Down -11.46 -0.52%
S&P 500 INDEX CAPS Rating: No stars