I’ve been watching Season 2 of In Treatment. It follows the therapy sessions held by the main character (Paul Weston) with four different patients, one for each day of the week; and Paul’s own sessions with his therapist every Friday evening. The first season moved a bit slowly – but the second is much more interesting. Especially because his Thursday patient is Walter, a big-time New York CEO: egotistical, obnoxious, suffering from deep-seated anxiety, and caught up in scandal.
The first time Paul meets Walter, Mr CEO is horrified by the fact that Paul hasn’t read about him in the papers. He then has a bit of a whinge about people reading the society, sports and arts sections, but never the business section: “the only news that matters.”
Maybe so. But my experience is that the business news is cryptic, often to the point of being incomprehensible. I can think of three possible reasons for this:
- The journalist doesn’t really understand what he/she is writing. Because of that, they can’t dress down the academic talk/opinions being offered by finance professors and economists without embarrassing themselves, so they just leave it as untouched as possible: making everything extraordinarily heavy on the “assumed knowledge of the reader”.
- The journalist doesn’t want to insult readers by being patronising with the explanations.
- I’m a bit dense.
Here’s a confession: I often have no idea why the business news is actually news.
When I see index movements, monetary policy announcements, new tax bills, takeover rumours, and industry reports, I have to spend some time thinking about it before it starts to mean anything.
And this is meant to be my industry.
Anyway, that’s my segue into talking about employment reports issued by the Department of Labour. Because for some time now, I’ve been blurry about why they’re so important – and this is a bit of an obvious epiphany moment.
How Did We Get Here?
Employment reports arrive regularly. In South Africa, Stats SA releases a Quarterly Labour Force Survey every, well, quarter. In the US, the Bureau of Labor Statistics releases employment statistics monthly. Britain has the Office for National Statistics, the Eurozone has Eurostat, China has the (questionable) National Bureau of Statistics of China.
And each time these numbers gets released, the CNBC folk talk about market reactions in the lead-up to the release, market reactions immediately after the release, and there’s a sudden spate of interviews on “what the numbers are saying”.
Asking “what are the numbers saying?” may seem like a reasonable place to start, but I’m not so sure that it is. Mainly because the numbers are an outcome rather than a starting point. Someone somewhere sometime in the past had this moment:
“Hey! You know what I could really use? Some information about the people that are working! And those that aren’t. And why.”
For me, that was the important moment. Meaning that perhaps a better opener for the CNBC anchor would be:
“So Jim… Tell me why we should bother with this report anyways. Who cares?”
Who Cares About Employment Numbers?
When you strip away all the dross and institution, economies are just groups of people transacting with each other. And there are two questions to be answered here:
- What they spend their money on; and
- When they spend it.
Here’s what people spend their money on:
- The small things (consumption) – like food and entertainment
- The big things (investment) – like cars and unit trusts
And why the timing is important:
- When people borrow, they’re spending tomorrow’s money today.
- When people spend what they earn, they’re spending today’s money today.
- When people save/invest, they’re going to spend today’s money tomorrow.
Each of the above drive the flow of money:
- Consumption levels affect Retailers, Manufacturers and the Healthcare Industry;
- Investment levels affect the Construction Industry, Real Estate and Financial Services;
- Borrowing levels affect Banks and Lenders;
- Saving affects everything by reducing all the above.
But all of these are only the one side of the equation. Consumption, Investment and Saving are all a function of income. And Borrowing is also a function of income (the more you earn, the more you can borrow), as well as a key determinant of the quality of the credit (the more you earn, the more likely you are to pay back, the better quality you are in a bank’s loan book). And, in popular theory at least, Borrowing can be negatively correlated with income (the more you earn, the less you have to borrow).
So if income is all-important, then what is Income? It’s a function of employment.
Hence the excitement around employment numbers. For example, higher employment numbers mean that the Retail industry can expect higher consumption, and investors can start shifting their equity holdings toward those industries. Lower employment numbers may mean that consumption will shift away from automobiles and toward low-end bulk food retailers.
And as a By-Product
Labour reports also give a breakdown of the hirings and firings taking place in each industry. This usually gives some insight into the direction about the growth/contraction of companies within that industry over the next period. After all, if an industry is unexpectedly hiring people in great quantity, you can be pretty sure that something exciting is happening that the market doesn’t quite know about yet.
The Word of Caution
When you read the headlines, the journalist in question has done some cherry-picking. A labour report should tell you five macro-numbers (amongst others):
- The total population in the labour-force age group (usually something like 15 – 64);
- The total number of people employed;
- The total number of people unemployed*;
*those who aren’t working, but are still looking for jobs.
- The total number of discouraged workers*;
*those who would work, but have given up looking for jobs.
- The total number of people that aren’t in the work force.
People can shift between each of those sub-groupings. So an increase in employment need not necessarily indicate a drop in unemployment. And, more importantly, a drop in unemployment does not necessarily imply an increase in employment.
Have a read of this article to illustrate the importance of that distinction.