Markets will overreact to the headlines

As the saying goes, “There are lies, damned lies and statistics.”

And on the primary Friday of each month, the American public gets plenty of recent statistics to read through. That is when the U.S. Bureau of Labor Statistics releases its latest jobs numbers. Within minutes of the info being released, news organizations are sending push notifications, experts are beginning to weigh in, and the headlines—and headline numbers—condense into an easy narrative that always goes something like this: “Jobs are up, the economy is saved” or “Jobs are down, we’re all doomed.”

These narratives have an enduring impact on investors and financial markets.

As a Professor of FinanceI feel these easy storylines aren’t helpful to investors. In fact, they’re harmful. Original narratives stick even when the underlying statistics contradict the numbers making the headlines. On June 7, 2024 when the most recent labour market data might be publishedI assume that the financial markets will overreact to the headlines.

I get it: The two jobs reports the Bureau of Labor Statistics releases every month contain a lot information that you could cherry-pick the info you think that is essential. But ignoring nuance is just not an excellent investment strategy. And it seems that economic reality is simply too complex to suit neatly right into a headline. As proof, let's have a look at how markets reacted to the past two months of jobs data.

Dive into the info

Let’s start with the Employment figures for Aprilwhich got here out on May third.

The headline numbers were worse than expected: The unemployment rate ticked from 3.8% within the previous month to three.9%, and each the variety of non-farm employees and the number of personal non-farm businesses were lower than expected.

The stock market gathered on account of this seemingly bad news since it saw the disappointing labor market reports as an indication that inflation is likely to be easing. This in turn could encourage the Federal Reserve to Interest rate cuts back on the table for 2024 – at the very least that’s what investors had hoped.

However, if you have a look at the info more closely, things change into slightly more complex.

The unemployment rate actually worsened, rising by one-tenth of a percentage point, while the Labor force participation rate. On the surface, things don’t look so good: it seems as if the unemployment rate has risen by 10 basis points. But that's since the office only calculates the unemployment rate to at least one decimal place. But what if you happen to calculate to 2 decimal places?

To do that, you’ve got to process some numbers yourself.

You can do that by going to the office Press release on the present employment statisticsnavigate through the several rows and columns after which get out the calculator to get a number for the month that’s one decimal place higher than what’s being reported to the media. Then you’ve got to repeat the method for the last month's data.

When you try this, you'll see that the unemployment rate barely modified in April: it rose to three.86% from 3.83% in March, a rise of just 0.03%, or 3 basis points. This suggests that those seemingly disappointing official unemployment numbers weren't so disappointing in any case.

Good headlines, bad news

You can see something similar within the Employment figures for Marchwhich got here out on April fifth.

The numbers were a lot better than expected and Financial markets celebratedThe total variety of employees outside agriculture was far beyond expectations303,000 recent jobs, in addition to the number of individuals employed outside of agriculture. The official unemployment rate fell to three.8%. On the surface, all excellent news.

But if you happen to dig deeper into the info, you get a unique perspective — particularly with the numbers showing what number of jobs were created in government and manufacturing. You should flip a number of pages within the “Current Employment Statistics” press release to seek out the relevant data — in “Employment Situation Summary Table B” — however it's all there.

If you Check out the March statisticsyou’ll discover that greater than 20% of the brand new jobs created are in government jobs. In addition, the info shows that zero jobs were created within the manufacturing sector in March.

These data suggest that the headline numbers from March – which suggested a really robust labor market – can have been deceptively optimistic. Too many roles were created in the general public sector and too few in manufacturing. That is just not a really healthy labor market.

As experts and the general public reflect on the labor market statistics released on the primary Friday of each month, they needs to be careful not to easily take the headlines as the entire story.

When it involves economics, easy representations may be misleading.