What Investors Need to Know About Today's Employment Report

Alex Dumortier, CFA, The Motley Fool
Updated

It's employment Friday! The Bureau of Labor Statistics released its highly anticipated employment report for May this morning. Here's the headline data:

  • U.S. nonfarm payrolls increased by 175,000 in May (forecast: 164,000).

  • The unemployment rate ticked up to 7.6% from 7.5% in April.

  • The labor participation rate is "little changed at 63.4%."

  • March's payroll additions were revised upward by 4,000, while April's were revised downward by 16,000 to 149,000

What are the implications for investors? Although the payroll increase came in ahead of expectations, the "beat" is within the margin of error, as the revision for the month of April demonstrates. As such, it is unlikely to be fueling the gains in the major indexes this morning. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average are up 1% and 0.98%, respectively, at 10:10 a.m. EDT.

Rather, in the topsy-turvy world of zero-bound interest rates and monetary experimentation, the uptick in the unemployment rate must be reassuring to investors who had become increasingly concerned that the Fed might taper its quantitative-easing program earlier than anticipated. Keep in mind that the current round of QE is open-ended and will continue "if the outlook for the labor market does not improve substantially." This month's report is well short of meeting that standard. Furthermore, a Fed rate hike is predicated on reaching an unemployment rate of 6.5%, so today's report pushes that back, too.


Writing in the Financial Times yesterday, Mohamed El-Erian, the CEO and co-CIO of asset manager PIMCO sees things differently. Breaking near-term monthly job creation into three ranges with differing impacts on the consensus view in asset markets, here's how he described the range corresponding to today's result of 175,000:

The next 3-4 U.S. monthly employment reports will have a big say on how the majority view evolves from here. Specifically: A tepid outcome -- i.e., average monthly job creation of 125,000 to 200,000 -- would fuel greater anxiety about both a growth handoff and policy effectiveness, placing greater pressure on the current artificial price levels of many riskier assets.

While I don't think that describes this morning's stock market reaction, it could well pan out over a longer time frame. Fed-backed asset-price lifting is a neat trick that dazzles the crowd, but over time investors may wish to peer behind the curtain.

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The article What Investors Need to Know About Today's Employment Report originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 Motley Fool has a disclosure policy.

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