Look Beyond the Jobs Report
NEW YORK (
) -- The main takeaway from Friday's jobs report shouldn't be that the unemployment rate is rising or that job losses are shrinking. Quite simply, the report reinforces the need for investors to look beyond the payroll numbers and focus on other relevant, timely economic data.
Friday's
nonfarm payrolls report had everything the market expected and nothing it wanted. The labor market contracted at a slower pace, and the unemployment rate rose higher, which was no surprise to investors. The Labor Department said that the U.S. economy lost 216,000 jobs last month, better than the 225,000 consensus.
With revisions to previous months totaling 49,000 additional losses, the overall number was bigger than bulls wanted to see. And while the unemployment rate jumped to 9.7% last month, which was above the consensus estimate of 9.5%, it wasn't high enough to completely spook buyers.
So after all the clamor leading up to the backward-looking August jobs report, traders are exactly where they were before the numbers crossed. After all, the expectation remains that actual job growth won't come until sometime in 2010, while the unemployment rate will likely top 10% before reversing course.
While they shouldn't dismiss these numbers completely, investors would be better served focusing on other more pertinent data that offer a clearer picture of what lies ahead. Even though it is easy for Main Street to relate to the unemployment rate and job losses, both numbers don't necessarily offer the best investment information.
"The job report gets so much attention, and yet everyone will admit jobs are a lagging indicator," said James Paulsen, chief investment strategist with Wells Capital Management. "There's not an economist that will tell you otherwise. The unemployment rate gets more attention than anything, and yet it's the most lagging indicator by a wide margin that there is. It's understandable, but it's curious."
Plenty of other market indicators deliver timely information well ahead of the jobs data. Obviously, policy changes, interest rate movements, the yield curve and trading of the dollar have the longest lead time and offer the best investment information. Following that, the movement of the stock market itself is a clear indication and certainly has a long lead time, along with credit spreads and commodity price movements.
If investors want better leading indicators of the economic recovery, Paulsen said weekly initial jobless claims are the best data with leading possibilities. "They're timely, and they tend to be leading indicators," Paulsen said. "One of the greatest signals that the recession was about to end was the peak in unemployment claims a few months ago. That's historically a good indicator."
Other economic reports with leading properties include the Institute for Supply Management's index reports on services and manufacturing. In the last week, the manufacturing index for August jumped to a reading of 52.9, indicating expansion in the sector. While the services index remains in contraction territory, it rose to a better-than-expected read of 48, the highest it's been in nearly a year.
"It's not even so much that the ISM reports indicate expansion or contraction as more the direction that it's moving," Paulsen said. "Their early signal came months ago. They both gave a clear signal of a recovery."
Of course, some will argue that investors can't look at any of the economic numbers at face value, because of the amount of stimulus money being poured into the economy. That makes deciphering whether a recovery is sustainable or not the real challenge for investors. Certainly, the government's employment report will do little to assure investors that any recovery can be sustained.
" 'Sustainable' is the key. We'll probably see a positive
gross domestic product number in the third or fourth quarter. Big deal. After that, you'll see some of the effects of the stimulus wear off," said Paul Nolte, director of investments with Hinsdale Associates.
Nolte isn't sure that the ISM manufacturing data can be relied on until the effects of the stimulus wear off. "Manufacturing is doing OK because of the money being handed down by the government, but again, that won't get us to the sustainable part," he said.
He also recommends taking the housing data with a grain of salt, much like the employment data.
"Even with housing data, it's skewed by first-time homebuyers and that a lot of buying activity is foreclosure sales," Nolte said. "
The majority of home sales have been distressed sales. That's not going to create a sustainable recovery."
Instead, Nolte recommends investors focus on consumer spending data and loan activity.
"If the consumer is not spending, you're not going to get that sustainable recovery," he asserts. "We saw sales go into the auto sector, but at the expense of everything else. The pie did not get any bigger. We really want to see the consumer expand the pie, but they simply allocated it differently."
Indeed,
Ford
(F) - Get Report
saw auto sales rise 17% year over year in August, while half of the 30 retail stores that post monthly sales data missed Thomson Reuters expectations, including
Saks
(SKS)
,
Abercrombie & Fitch
(ANF) - Get Report
and
J.C. Penney
(JCP) - Get Report
.
-- Written by Robert Holmes in New York.
