Focus on Labor: The History & Importance of Employment Data

KATHY JONES: I'm Kathy Jones.

LIZ ANN SONDERS: And I'm Liz Ann Sonders.

KATHY: And the is On Investing, an original podcast from Charles Schwab. Each week, we analyze what's happening in the markets and discuss how it might affect your investments.

LIZ ANN: Well, Kathy, it's a shorter week this week thanks to the Labor Day holiday. I don't know about you, but I love me a four-day work week. I wish we could condense things into four days every year. I'm not sure the New York Stock Exchange would abide by those wishes, but we can dream. But we wanted to take the Labor Day holiday as a jumping off point to dig into some of the context and indicators around the labor market in a broader, arguably more evergreen sense. Now, we all know there are a few headline numbers that tend to garner most of the attention when they're released. So within the monthly jobs report, you get the payrolls number, you get the unemployment rate.

Then on a weekly basis, we get initial jobless claims, continuing claims. Back to within the jobs report, you get metrics like average hourly earnings and the labor force participation rate. And we are taping this in advance of this Friday's nonfarm payroll report, which will be the August release. And that will give us an indication on how the economy is doing and if the unemployment rate has continued to tick up.

Again, much like a good chunk of last year, seems like every week there are folks out there commenting on recession, recession indicators, what works, what doesn't, what makes this time different. On this show, we've talked about the Sahm rule. We had Claudia Sahm as a guest. You had a great conversation with her. We've talked about leading economic indicators, the inverted yield curve, as metrics that maybe aren't as powerful in terms of sort of recession timing as they've been in the past. You know the Sahm rule is one that's particularly interesting. Many people who can't necessarily explain the Sahm rule or the yield curve understand the employment rate, and what I found most interesting about the Sahm rule having triggered with the most recent release prior to the one coming on this Friday is that even Claudia herself has not so much pushed back on the rule but maybe provided some caveats. So I don't know if you have any thought on that, Kathy.

KATHY: Well, I think that Claudia's articulated it pretty well that this cycle is different, that we've had a significant amount of fiscal stimulus going into the cycle as opposed to responding to a downturn in the economy by the government actually kicking in those fiscal stabilizers for the downturn. I think that that's probably the big change there.

But I do think what we're seeing in the data right now is just a normalization, a return to sort of pre-pandemic labor market, or even a little bit softer than the labor market that we had pre-pandemic. Today's JOLTS report showed the quits rate is down quite a bit now, meaning fewer people are voluntarily leaving their jobs, which is usually an indication that they're more concerned about finding another job if they need to.

And the job openings number is now down to where it was in 2021. I think what we're seeing is that normalization. And as we've talked about a number of times, Liz Ann, this has been a really tough labor market to analyze, a really tough cycle to analyze with all of the cyclical data. And I think that that's kind of where we are right now with that. But it doesn't look like we're in recession at this stage of the game.

So Liz Ann, I think it's kind of nice to be able to focus on the labor data the same week as we have Labor Day. As you mentioned, it's great to have a four-day week, but a little background on Labor Day. It has been a federal holiday since 1894.

Prior to 1894, about 10 years ahead of that, President Chester Arthur signed the law establishing the Federal Bureau of Labor, and it was then placed in the Department of the Interior. So we didn't actually have a Labor Department until much later. The background is in the 1870s and 1880s, labor leaders were really focused on creating Bureaus of Labor Statistics at the state level. Much as they had agricultural statistics at the state level and still do, that was kind of the way in the United States you gather data. And then a dozen states had their own bureaus by the time the federal bureau was established. The Department of Labor has an article on their website that tells the whole history of how the department came to be and how it took until 1913 for the Department of Labor to become, you know, a full cabinet department with a secretary. And we can link to that article in the show notes. 

But a couple of things always stand out to me about the labor market now versus originally. You know, much of the push for having a labor department came out of the Industrial Revolution and out of the organization of workers in various ways and unionization.

Having grown up in the Midwest, the Haymarket riots in Chicago in 1886 were kind of a foundational part of our history study. We knew all about it. We visited the Haymarket Square. We kind of learned about labor and how unionization and industrialization sort of went hand in hand. So it's a really interesting long history. But the other little factoid that always sticks with me is, you know, in the in the early 1900s, about 40 to 50% of the people in the U.S. economy were agricultural workers. And now it's down to less than 10%. It's a pretty small fraction. So we've really seen this huge shift in the labor market sort of broadly over the last 100 years or so to go from an agricultural to industrial and now a service sector economy. And that's why we look at nonfarm payrolls.

If you included the farm population, it would be seasonal, would be hard to adjust. It would be a whole different story. So that's why it's separated out.

LIZ ANN: Yeah, that's how the moniker for the payrolls data that we get is "nonfarm." And you're right, there's that seasonal component to it. If you did include them, the caveats would be incredibly numerous. And I think that the calculation methodology would be really, really tricky. So for farm labor, the U.S. Department of Agriculture tackles those. And nonfarm payrolls also exclude jobs like private household employees, unpaid volunteers, the unincorporated self-employed, which are also all highly volatile employment numbers. So the U.S. Census Bureau tracks data related to self-employed workers. And you can see how fragmented the data set has become. 

The other interesting thing that maybe some people don't realize is that there are two surveys conducted by the Bureau of Labor Statistics on a monthly basis. There's the Establishment Survey and the Household Survey. It's the Establishment Survey that generates the payrolls number every month, and it's the Household Survey that generates the unemployment rate. And the payroll survey is basically a survey of companies, so it's counting jobs, whereas the Household Survey is a survey of people.

And there can be, at times, a pretty significant spread between what those two surveys suggest about the health of the labor market. And it's been particularly acute in this cycle with, if you go back over the past couple of years, you have about a 3 million jobs differential in what the payroll survey has suggested in terms of the number of jobs created. That's the higher number versus the Household Survey.

For what it's worth, the Household Survey tends, not always, but tends to be a little bit more accurate at inflection points. And there's a few reasons for that. Number one, the Household Survey is not subject to the kind of revisions that happens with the Establishment Survey. I always tell people, "Go beyond just the release of the headline when you get the monthly jobs report." The first release that comes when all the breathless reporting is happening at 8:30 a.m. Eastern Time on a Friday is around payrolls. But one of the next pieces of information you get are the prior two months revisions to the releases. And then we also get these annual benchmark revisions, which did capture a lot of attention as probably most market watchers that are listening to this show are aware of a week or two ago when there was a huge downward revision. We discussed this on the last episode to the tune of more than 800,000 jobs were revised out. And that's in part due to assumptions and estimates that the BLS makes about the labor market and, in particular, the birth-death model, which is not the birth and death of people; it's the estimated birth and death of businesses. And at inflection points, meaning when the economy is slowing, particularly if we're heading into a recession, which at this point it doesn't look like that's the case right now, you tend to see an overestimation of business births and an underestimation of business deaths. And that helps to explain why some of these benchmark revisions can be fairly significant. 

You know, one of the things we've been talking about, Kathy, and I wanted your thoughts on this, is Fed policy as it relates to the Fed's dual mandate, and inflation, which is one of the two mandates, has been front and center, certainly during the hiking part of the Fed's campaign. But now as we head into what we assume will be an initial rate cut at the September meeting, clearly that labor market mandate is coming into sharper focus. So what are your latest thoughts there?

KATHY: Yeah, I mean, we all know the Fed cares a lot about employment, as you mentioned, part of the dual mandate. And just to spell out "What is a dual mandate?" It means the Federal Reserve … is tasked with promoting maximum employment and stable prices. And that's the balance that they try to achieve when they're setting policies. How do you keep inflation down without putting too many people out of work and vice versa, right?

And so this is why the job is not as easy as it maybe sounds or it looks on paper because those are moving targets at all times. It's not a steady-as-you-go thing very often. So it's a balancing act, teeter-totter, that they have to maneuver all the time without overthinking it and overdoing it and moving rates around constantly.

So you know, maximum employment is vital to a strong economy. It boosts productivity, and that's one of the great things about this cycle. It looks like we've seen a real burst in productivity, which is fantastic. It promotes business investment, increases innovation, helps the long-run growth potential. You know, having a rising pool of labor helps the whole economy. So nobody at the Fed wants to kill that.

On the other hand, they don't want the labor market to be so strong that it drives consumer demand to excesses that drives inflation. So this is where they are right now with the labor market showing signs of really cooling off at the same time where inflation is pretty much at target or very close to that 2% target. So now they're trying to recalibrate and say, "OK, now we've got inflation where we want it to be, we have to try to get the job market to steady here. We don't want to sacrifice too many jobs on the altar of stable inflation once we've gotten that stable inflation." So we'll see. We're still looking for 25 basis points in rate cuts at the September meeting, but there is a growing thought process out there that maybe they'll go 50 just to get the ball rolling. I still doubt it. still think this is a steady-as-she-goes kind of Fed.

LIZ ANN: What do you think it would take in terms of this Friday's jobs report that would move that needle in terms of expectations around 25 versus 50?

KATHY: Yeah, I think the expectation for job growth in this report is actually fairly strong, like around 160, 170,000 to make up for the shortfall last month and some of the seasonal factors there, the hurricane factors, etc. So if we were to come in, you know, close again to last month's level around 110, 115, something like that, and you were to see, you know, hours worked drop, I think it's really important to look at the hours worked because you can have a job, but if your employer says, "Fine, we want to keep you on the payroll, but we can't give you as many hours," well, your income is dropping, right? Your earnings are dropping, and that's going to slow the economy. And that's often what happens early in the cutting cycle when employers aren't ready to lay people off because they're not really sure if that's the right thing to do, but they will cut back the hours because the demand is down. So it's a really crucial thing to watch on there. So if we were to see widespread deterioration and maybe downward revisions to last time, then I think we could talk about 50. And this is just a judgment call on the part of the Fed. This is not according to any rules. There's no algebra we can apply to this decision. This is how the various members look at where we're going in the future. So I think that it will raise the odds if it's a very weak report relative to expectations, but it's still not a slam dunk because the kind of messaging we're getting from still the majority at the Fed seems to be they want to take it step-by-step, baby steps, to make sure that they're on the right track.

LIZ ANN: Yeah, I wanted to throw in another indicator, too, that has a great historic correlation with official unemployment numbers. And so the unemployment rate from its low of 3.4% is now up to 4.3%. So almost a full percentage increase. And as we've talked about on this program, you don't tend to see the unemployment rate once it inflects to just kind of bounce around at a low level. Once it starts to move higher, it continues to move higher, and vice versa when you're on the other end of the spectrum, and you inflect on the way down. But there is a key labor indicator that doesn't capture as much attention perhaps as things like payrolls and the unemployment rate. And it's something called the labor differential. It's not put out by the Bureau of Labor Statistics. It comes out as part of the Consumer Confidence Report, which is put out by the Conference Board. And it measures jobs hard to get minus jobs plentiful.

And that's now at a cycle high of −16.1. And that's consistent with a jobless rate of more than 4.5%. And not only does it have a very high historic correlation, there's not much of a lag in that correlation. So now, what we've spent a lot of time on this podcast talking about, and you already touched on, is just how unique this cycle has been. And there's so many cross currents and so many metrics that have not mapped to historic trends. So you know, we might be throwing this one out again and saying, "All right, well, it did not appropriately correlate to a move up," but I just wanted to throw that in as an example.

KATHY: There's a lot of fairly unique things like that that are going on in this cycle. And I think it's important if people feel like it's hard to get a job, they may be discouraged from looking for a job. Or one of the things I pay attention to are the surveys of people coming out of school. And are they having a more difficult time finding employment coming out of high school or college or trade school or whatever? Because when that happens, it's a pretty significant sign that things are slowing down. Because I don't know, for years now, we've had employers looking at those schools for workers, right? And offering training programs because of a shortage of workers. And now that seems to be ebbing and going the other direction, where it's taking longer to find a job. There's not as many opportunities. And that certainly could be a sign that things are slowing down.

But it's very difficult to track in real time. It's more anecdotal. But I do see that jobs hard to get versus plentiful is a really important indicator, I think, of where things are headed. Because those are people really in the market looking for work who are reporting on it.

LIZ ANN: And even some of these signs or indicators that are more anecdotal, I think, is particularly important in this cycle because of the connectivity between confidence in the labor market and consumption. And with the savings rate now down to under 3%, and the excess savings largely having been drawn down, maybe not for the ultra-high end of the income spectrum, but certainly down, I think maybe one of the keys to have maintained decent consumption trends in the face of that dwindling savings story has been confidence in the labor market. So it's not just the impact of people losing their jobs or having to file for initial unemployment insurance in terms of the feeder into consumption, but it's through those psychological channels as well that I think is important to watch in this cycle.

KATHY: Yeah, I think it comes down to a real simple proposition. When people have jobs, and they feel confident in their jobs, they'll spend money. And that will drive the economy. And when they feel nervous about their job, or they can't find a job, they're going to pull back. And that's going to have a big impact on the economy. And I hate to reduce everything to such simple terms, but I think that at the end of the day, that's what we're all searching for. "Where are we on that spectrum?"

So Liz Ann, that's been a fun Labor Day week update. But now we're heading into mid-September. It's hard to believe. We're going to be looking at the fourth quarter before you know it. But what are you watching for next week as we get into the middle of the month?

LIZ ANN: Well, CPI and PPI metrics for inflation. So those are obviously paramount. PCE is the Fed's preferred measure, but they also pay attention to CPI and PPI. And we have to remember that once you get CPI and PPI, you can actually map it to what PCE is likely to read. And I would tell people to not just look at the initial releases, headline versus core, but also look at, you know, three-month annualized change and six-month—those, you know, multi-month trends, which the Fed focuses on. The NFIB data comes out, which is National Federation of Independent Businesses. It tracks what small businesses are doing. And there's a lot of components to that release. There's an overall headline index, but there's a lot of component parts, including questions around "What's your single biggest problem?" which is inflation has been running number one. But I wouldn't be surprised if that starts to adjust prior to the recent inflation surge to the point that you made about where we were, you know, a year or two ago, where there were labor shortages, and companies were desperate to try to hire people, quality of labor for a while there was the number one concern, and that gave way to inflation. 

But I would also pay very close attention to the employment components of that survey because small businesses are the largest net job creators. So I think that that is important. Claims is a weekly number. So we always get claims every Thursday, but that's important to watch. And then we get the University of Michigan consumer sentiment, which is similar to consumer confidence. But interestingly, consumer confidence based on the types of questions that are asked tends to be geared a little bit more toward what's going on in the labor market, whereas University of Michigan consumer sentiment tends to be biased a little bit more by what's going on with the inflation backdrop. 

So this could be an interesting switch scenario here, where during the height of the inflation problem, consumer sentiment plunged to all-time lows, where consumer confidence kind of hung in there a little bit more because of the labor market being healthier. Now we may have a little bit of this swap starting to happen, where you'll see more pressure on consumer confidence if we see weakening in the labor market and maybe some improving sentiment per the improvement in inflation. 

So what about you, Kathy? What's on your radar? I'm sure it's also CPI and PPI, but what else are you keeping an eye on?

KATHY: Yeah, obviously the inflation numbers are important. But in the broader context, one of the things I've been eyeing is the weakness in commodity prices lately. And I think if you look at oil, if you look at iron ore, I've said, the industrial metals, copper, these were all the darlings for a while, the commodity folks, and they've all been plunging. A lot of this has to do with weakness in China and the translation of weakness in China to weakness in Europe, particularly Germany and the manufacturing sector, because they really are tied together. And when I look at that combined with the declining trend of inflation here, I question whether the Fed is really pretty far behind in terms of cutting rates. We have a very tight monetary policy, very high real interest rates that are having an impact on the economy, and inflation's coming down, and now we're getting the global impact is really strong. And of course there's the Beige Book, which the Fed prepares for its upcoming meeting. So all the districts kind of provide information about what's going on in the local economy. So taking a close look at that. 

Yeah, kind of a global focus along with the domestic focus for me. I think it's going to be an interesting September. We've got a lot going on right now. 

So that's it for this week. Thanks for listening. I mentioned we'd link to the Department of Labor article in the show notes, so look for that. We'll also link to the BLS website, BLS.gov—that's Bureau of Labor Statistics—as there's just a ton of great data on there. And they also have things like geographic information, specific parts of the country, what their unemployment rates are like, and also CPI inflation calculators. If you're inclined to get lost on these websites as we are, this is going to keep you busy for a long time. And as always, you can keep up with us in real time on social media. I'm @KathyJones. That's Kathy with a K on X and LinkedIn.

LIZ ANN: and I'm @LizAnnSonders on X and LinkedIn. If you see anything that claims to be from me on Facebook or Instagram or WhatsApp, or I think there's another one that popped up recently, none of those are me. Those are imposters. I do not have a private stock-picking club where I'm guaranteeing you returns. I can't believe there are people that get duped by that and think that's something I or we would do. So make sure you are following the real me.

And if you've enjoyed this show, as always, we'd be grateful if you would leave us a review on Apple Podcasts, a rating on Spotify, or feedback wherever you listen. And you can also follow us for free in your favorite podcasting app. We'll be back with a new episode next week, so stay with us.

KATHY: For important disclosures, see the show notes or visit schwab.com/OnInvesting.