Employee Situation Report

By Ryan Barnes

Release Date:	The first Friday of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month
Released By:	Bureau of Labor and Statistics (BLS)
Latest Release:	http://stats.bls.gov/news.release/empsit.nr0.htm

Background
The Employment Situation Report, also known as the Labor Report, is an extremely broad-based indicator released by the Bureau of Labor Statistics (BLS). It is made up two separate and equally important surveys. The first, the "establishment survey", is a sampling of more than 400,000 businesses across the country. It is the most comprehensive labor report available, covering about one-third of all non-farm workers nationwide, and presents final statistics including non-farm payrolls, hours worked and hourly earnings. The data sample is both large and deep, with breakouts covering more than 500 industries and hundreds of metropolitan areas.

The second survey, referred to as the "household survey", measures results from more than 60,000 households and produces a figure representing the total number of individuals out of work, and from that the national unemployment rate. The data is compiled by the U.S. Census Bureau with assistance from the Bureau of Labor Statistics. This carries a census-like component, bringing demographic shifts into the mix, which gives the results a different perspective.

Both sets of survey results will show the change from the previous month, and also year-over-year, as trendlines are very important with this often volatile statistic.

What it Means for Investors
The Employment Situation Report is a multi-layered release, with many links from the main page and following the headline discussion items. Because there is so much information provided, it's important to identify the numbers that will be most watched.

The non-farm payrolls figure is very important on Wall Street; it's the benchmark labor statistic out there used to determine the health of the job market because of its large sample size and historical significance in relation to accurately predicting business cycles. Economists have settled on the number of 150,000 jobs as the level that defines economic growth. Gains of roughly 150,000 jobs or more indicate expansion of the labor force, while anything below indicates a weak job market.

The payroll figures from the establishment report are considered a coincident indicator.

Each survey comes up with its own figures for total employed persons using very different tacks. The establishment report is larger, and theoretically more accurate, but excludes private households, the self-employed and the agricultural sector. The household report runs on a smaller sample and may be more subjective, but the inclusion of self-employed workers, for example, can make this figure more valuable in a time when many people are starting their own business (as often happens in the beginning of a new business cycle).

Average weekly hours for the manufacturing sector, as presented in the establishment report, is a leading indicator, and is represented in The Conference Board's U.S. Leading Index.

The unemployment figures from the household report (which is probably the most watched metric of the release after non-farm payrolls) are considered a lagging indicator, as people tend to be out of work when problems in the economy have already manifested themselves in falling economic output (less workers, less GDP).

Investors study the labor report to look for trends indisposable income, wage inflation and employment statistics, many studying industries of personal interest to them. Analysts will usually conclude that if payrolls are increasing and wages are rising, that personal consumption stats like retail sales will advance as well, as more money will be in the pockets of consumers.

The Fed watches this report intensely. Alan Greenspan used up good a deal of his allotted minutes during all those years of Senate briefings talking about the labor markets, specifically information contained in the benchmark Labor Report. The unemployment rate alone makes up more than 47% of the lagging index created by the Conference Board and used by the Federal Reserve Board.

In relation to the hourly employment costs, investors can be best served by using the figures here in conjunction with the Employment Cost Index, which comes out about a week after the Labor Report in the four months the ECI is released (ECI is a quarterly report). A key to look for is whether wages are keeping pace with inflation; if not, the real purchasing power of consumers will drop.

The household survey takes into account demographic changes to some degree, whereas the establishment survey only counts the total number of payrolls. In effect, the household survey acts as a mini-census, which is why the same employment report may show an increase in payrolls, while the unemployment rate simultaneously rises, a seeming contradiction in terms.

The number of hours worked data can shed light on where the economy is in the business cycle; companies will often stretch the hours of their current workforce before they decide to hire new workers. This conservative behavior likens to "testing the waters" of the economy before committing to hiring for future growth.

Investors can pore over the industry-specific numbers to get a good feel for labor trends within the industries investors have holdings in - there may be pockets of strength in an overall weak labor report.

Labor statistics can tell us a lot, but they do not necessarily define the economy. Many industries can be well positioned to remain profitable even during tough labor markets - financial services, for instance, can easily lay off workers and keep labor tight until conditions improve, while more capital-intensive industries such as manufacturing (with its higher fixed cost structure) may suffer bigger hits in profitability.

Strengths:

• As one of the most widely watched reports, the Employment Situation Report gets a lot of press and can move the markets.
• Summary analysis provided by the BLS (top link on the site) on the top-level release of an already detail-rich report
• Relates to investors on a personal level; everyone understands having a job or looking for work.
• Services industries are covered here - it is hard to find good indicator coverage of service-based businesses.

Weaknesses

• Summer and other seasonal employment tends to skew the results.
• Only measures whether people are working; it does not take into account whether these are jobs the people wish to have, or whether they are well-suited to workers' skills.
• Volatile; revisions can be quite large, and updates should always be viewed in the most recent report.
• Unemployment and payroll figures can seem to be out of alignment, as they are derived from two different surveys.
• Compensation costs portion is considered inferior to the Employment Cost Index.

The Closing Line
The Employment Situation Report is a very powerful indicator that is able to move the markets dramatically if the results surprise Wall Street. Heavily analyzed, the report is the single best way to understand the state of the labor force at any point in time.

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