Wall Street’s obsession with monthly employment figures is nuts. The 271,000 U.S. jobs created in October are obviously important for those who found work, but the number means less than investors might think. Nonfarm payroll data are volatile, prone to revision and lousy indicators of economic health. They’re important mostly because traders, analysts and journalists give them outsized attention.
The overall U.S. employment trend has been positive over the past few years. About 230,000 jobs have been created on average each month in 2015, dropping the unemployment rate from around 10 percent in 2010 to 5 percent in October.
Yet short-term numbers are unreliable, depending on the weather, the season, temporary layoffs and other unpredictable factors. Department of Labor statisticians can’t always compensate for the changes, leading to a margin of error of about 100,000 jobs either way – and often to later revisions.
The monthly variations are also tiny compared with the size of the economy. The United States has about 319 million residents, of whom about 150 million are working.
What’s more, nonfarm payroll figures are all but useless in predicting the economy’s performance. The number of reported U.S. jobs rose right up until the start of the last recession in late 2007. And after the recovery began in 2010, the number continued to drop for several months.
The data do have some value, of course. They’re a rough gauge of what the economy is doing at that moment, with employment gains typically indicating an expansion and losses a contraction. It’s sort of the economic equivalent of sticking your hand out the window to see if it’s raining. October, it seems, was a sunny month.
Wall Street will nonetheless await the next report with bated breath. Fixed-income investors may scrutinize it for signs of whether the Federal Reserve will raise interest rates – despite the tenuous relationship between employment and inflation. Traders might place bets based on their predictions. And journalists will no doubt pounce on the numbers in search of a story. In a more rational world, though, the monthly jobs figures would get the demotion they deserve.