Shortly after this column is first posted on June 3, the Labor Department will issue its report on employment and unemployment in May. By the time you read this, you will likely have seen or heard accounts of the headline numbers — “The economy created (or lost, though that would be a big surprise this time) so many jobs,” or “The unemployment rate rose (or fell) to such and such a percent.”
Farmers and ranchers have usually not spent much time focusing on these numbers. That’s understandable: Unemployment isn’t a big problem for producers who run their own businesses and the jobs-created figure specifically excludes farm jobs.
But this is, arguably, the most important macroeconomic report the government puts out each month and the effect it has on financial markets can spill over into ag commodities. Some first Fridays, the opening direction of the Dow Jones in the wake of the employment-situation report serves as a good predictor of corn’s opening.
So it’s worth spending a few moments looking at how to read this report. A key starting point is that it combines the results of two very different surveys. One polls 50,000 households, the other 390,000 business establishments.
Both surveys are conducted during the week that includes the 12th day of the month and both produce page upon page of detailed data, with enough breakdowns to satisfy even the freakiest stats freak. But two numbers, one from each survey, grab most of the attention, as they’re the numbers the news media headline.
The household survey’s headline number is the change in the unemployment rate. It’s the more politically sensitive of the two: When unemployment is low, incumbents stand a better chance of reelection; when large numbers of people are out of work, voters often take out their unhappiness on the ins.
Financial markets care about unemployment, too, but they usually pay more attention to the headline number from the establishment survey, the number of nonfarm jobs created or lost. If payrolls are surging, the market takes that as an indication of healthy economic growth, a bullish signal.
The headlines don’t tell the whole story, of course. The headline unemployment rate, for example, only covers jobless people who are looking for work; it excludes the “discouraged workers” who’ve given up looking — about a million people in April on top of the 13.7 million unemployed. You have to dig deep into the report to find information about them; what moves markets, at least initially, is not that information, but the headline number.
The establishment survey includes data on hours worked, earnings and employment by industry that provide a more rounded picture of the country’s jobs’ situation. But they’re not the numbers that make the headlines.
This, to be sure, is an over-simplified portrayal of the market’s sometimes complex reaction to the two reports. Traders buy and sell on headlines, but a look at the underlying data can cause them to reappraise.
For example, when discouraged workers return to the labor force and start looking for jobs again, their return drives up the unemployment rate even though it shows renewed hope in an economic upturn. Diving into the report’s detail and learning that, traders who’d sold the rising-unemployment headline could end up buying.
Similarly, the headline payroll number counts all jobs equally, regardless of how much they pay. When McDonald’s adds 50,000 restaurant employees, as it did a few months ago, the economic impact is not the same as tech companies adding 50,000 computer programmers. As awareness of this spreads, traders who’d initially bought the jobs increase could end up selling.
It takes something like 80,000 to 100,000 new jobs a month just to keep up with population growth. Doubting economists want to see as many as 500,000 added jobs each month before they’ll agree the economy is growing healthily. (In April, the number added was only 244,000.) Expectations play a role, as well; 250,000 would be bullish if the markets were anticipating 100,000 but bearish if they foresaw 400,000.
The interaction between stock and bond markets on the one hand and ag-commodity markets on the other can be complex, too. Since the beginning of 2010 the daily-chart correlation between the CME corn contract and the Dow Jones Industrial average has been a strong 92{dfeadfe70caf58f453a47791a362966239aaa64624c42b982d70b175f7e3dda2}. But even during times of strong correlations, the movements can diverge on a given day. And there are periods when institutional money moves out of one asset class and into another, shattering correlations.
Sometimes a strong jobs report can scare financial markets into fearing that the economy will grow too fast, sparking inflation. That can cause investors to get out of U.S. Treasury paper and into foreign stocks or bonds, with the result being a falling dollar. In most cases a falling dollar means rising ag-commodity futures prices, on the expectation of American ag exports becoming more competitive. So in this case, financial and commodity markets would react differently to the news.
It’s frustrating for farmers when commodity futures don’t move in the direction that supply-and-demand fundamentals for cash commodities indicate. Understanding a few of the key non-agricultural statistics won’t, by itself, make farmers rich, but it can help them understand what otherwise might seem like inexplicable market moves.
