This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
I. Introduction: How to Track the U.S. Economy
Every investor understands the intimate relationship between the economy and stock market.
Healthy Economy Ahead = Rising Stock Prices
Faltering Economy Ahead = Look Out Below!
Unfortunately, every month there are countless economic reports to sort through. Often, they have conflicting information about the trend in place. And to make matters worse, my fellow economists never seem to be in agreement.
So, what is an investor to do?
You must learn to pass judgment on the U.S. economy yourself. Gladly there is a simple system I use that does very well in this regard. Read on to learn how to employ it in the future. Plus, I share my current outlook for the economy and stock market given this information.
The Only Indicator You Need Is…
U.S. Non-Farm Payroll data!
The Federal Government publishes it on the first Friday after the end of each month. This first dose of Preliminary Payroll data uses 200,000 firms. A later round of Revised Payroll data uses a fuller 400,000 firms.
There is no second place here, even though it seems like there is, particularly if you watch all of the business news shows day-after-day. The reason? Monthly Payroll data is a comprehensive “co-incident” indicator in economist-speak. This means it accurately takes the current pulse of the entire U.S. Economy, without any help.
One thing you should also understand: Governments create this number for their own consumption. Our President and National Security Council, among others, get the monthly Payroll number a day or two before stock markets do. That is how important it is. (States have similar statewide payroll numbers collected.)
For an investor in stocks, the national Payroll number is the best insight you have into how ALL companies, large and small, are doing. When companies collectively prosper in our Economy, making more profit, and acquiring more revenue, they must add to the total payroll of the nation.
The Good, the Bad and the Ugly
The Ugly comes first.
In May, my friends in the economist profession thought the Payroll number would be +325,000. The Preliminary number came out and it was +390,000. This shows you the first problem with economists who forecast. They look two months back, and not two months ahead. Like sheep, we economists like to gather together into flocks and look at our tails.
Then comes the Bad.
Our second problem? When the stock market surges ahead, up go economist Payroll forecasts. When the stock market tanks, ditto for economist Payroll forecasts.
And finally, the Good…
One of the biggest problems investors have been plagued with is the sheer number of “catastrophic” big picture problems thrown at them. You know them by heart, I am sure. The Euro or Yen could implode, Europe can have a Recession, one that may get worse, the U.S. fiscal deficits grow, a possible global easy money banking panic threatens, a historic U.S. drought strengthens, this list goes on and on.
What you may not fully appreciate? National Non-Farm Payroll numbers tell you whether any “big” issue really had a meaningful effect on the firms you own stock in. You don’t need to know anything, at all, about any of these issues. Until they start to trim Non-Farm Payrolls in a noticeable way.
My rule of thumb: Get out of all of your stocks if the Non-Farm Payroll number is fully negative, after revisions, for two or three months in a row.
When do you get back in? When a very obvious trend of improvement in national Payroll numbers materializes. Not when they are positive again. That is too late! Once the turn towards better Payroll numbers happens, and it needs to be three trending months of the same direction, it is time to get back in.
Getting a Jump on Monthly Employment Data
To check up on this monthly number before it is released, for yourself, look to the weekly unemployment benefits claims. The simple rule to follow is four weeks of unemployment claims numbers make up a payroll month.
Think of it as the Chinese abacus of investing.
For example, in the week ending June 4th, 2022, the U.S. Dept of Labor’s advance figure for seasonally adjusted initial U.S. unemployment claims was 229,000, an increase of +27,000 from the previous week’s revised level.
The 4-week moving average claim numbers was 215,000. On April 30th, the 4-week moving average was 188,500. On March 26th, the 4-week moving average was 171,000.
Hence, the May monthly nonfarm payroll number should be somewhat weaker than the solid March and April job adds.
You don’t have to go any further than that.
If you have the discipline of believing in your investing abacus, counting up claims week-by-week, you have a homegrown and easy tool to develop your own monthly payroll forecasts.
And that is the only essential macro forecast you must make for yourself.
What’s This Indicator Telling Me Now?
The first week in June saw claims rise +27,000 to 229,000. The previous week’s level was revised up by +2,000 from 202,000.
If the U.S. labor markets average 230,000 in initial unemployment claims each week in June, expect to see roughly a -20% decline, or +320,000 for June Payrolls additions.
If that comes to pass, that means the end of the world is not here.
Stock traders will breathe a sigh of relief.
It is that easy.
Warm Regards,
John Blank
Zacks Chief Equity Strategist and Economist
Image: Bigstock
The Only Investment Indicator You Need
This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
I. Introduction: How to Track the U.S. Economy
Every investor understands the intimate relationship between the economy and stock market.
Healthy Economy Ahead = Rising Stock Prices
Faltering Economy Ahead = Look Out Below!
Unfortunately, every month there are countless economic reports to sort through. Often, they have conflicting information about the trend in place. And to make matters worse, my fellow economists never seem to be in agreement.
So, what is an investor to do?
You must learn to pass judgment on the U.S. economy yourself. Gladly there is a simple system I use that does very well in this regard. Read on to learn how to employ it in the future. Plus, I share my current outlook for the economy and stock market given this information.
The Only Indicator You Need Is…
U.S. Non-Farm Payroll data!
The Federal Government publishes it on the first Friday after the end of each month. This first dose of Preliminary Payroll data uses 200,000 firms. A later round of Revised Payroll data uses a fuller 400,000 firms.
There is no second place here, even though it seems like there is, particularly if you watch all of the business news shows day-after-day. The reason? Monthly Payroll data is a comprehensive “co-incident” indicator in economist-speak. This means it accurately takes the current pulse of the entire U.S. Economy, without any help.
One thing you should also understand: Governments create this number for their own consumption. Our President and National Security Council, among others, get the monthly Payroll number a day or two before stock markets do. That is how important it is. (States have similar statewide payroll numbers collected.)
For an investor in stocks, the national Payroll number is the best insight you have into how ALL companies, large and small, are doing. When companies collectively prosper in our Economy, making more profit, and acquiring more revenue, they must add to the total payroll of the nation.
The Good, the Bad and the Ugly
The Ugly comes first.
In May, my friends in the economist profession thought the Payroll number would be +325,000. The Preliminary number came out and it was +390,000. This shows you the first problem with economists who forecast. They look two months back, and not two months ahead. Like sheep, we economists like to gather together into flocks and look at our tails.
Then comes the Bad.
Our second problem? When the stock market surges ahead, up go economist Payroll forecasts. When the stock market tanks, ditto for economist Payroll forecasts.
And finally, the Good…
One of the biggest problems investors have been plagued with is the sheer number of “catastrophic” big picture problems thrown at them. You know them by heart, I am sure. The Euro or Yen could implode, Europe can have a Recession, one that may get worse, the U.S. fiscal deficits grow, a possible global easy money banking panic threatens, a historic U.S. drought strengthens, this list goes on and on.
What you may not fully appreciate? National Non-Farm Payroll numbers tell you whether any “big” issue really had a meaningful effect on the firms you own stock in. You don’t need to know anything, at all, about any of these issues. Until they start to trim Non-Farm Payrolls in a noticeable way.
My rule of thumb: Get out of all of your stocks if the Non-Farm Payroll number is fully negative, after revisions, for two or three months in a row.
When do you get back in? When a very obvious trend of improvement in national Payroll numbers materializes. Not when they are positive again. That is too late! Once the turn towards better Payroll numbers happens, and it needs to be three trending months of the same direction, it is time to get back in.
Getting a Jump on Monthly Employment Data
To check up on this monthly number before it is released, for yourself, look to the weekly unemployment benefits claims. The simple rule to follow is four weeks of unemployment claims numbers make up a payroll month.
Think of it as the Chinese abacus of investing.
For example, in the week ending June 4th, 2022, the U.S. Dept of Labor’s advance figure for seasonally adjusted initial U.S. unemployment claims was 229,000, an increase of +27,000 from the previous week’s revised level.
The 4-week moving average claim numbers was 215,000. On April 30th, the 4-week moving average was 188,500. On March 26th, the 4-week moving average was 171,000.
Hence, the May monthly nonfarm payroll number should be somewhat weaker than the solid March and April job adds.
You don’t have to go any further than that.
If you have the discipline of believing in your investing abacus, counting up claims week-by-week, you have a homegrown and easy tool to develop your own monthly payroll forecasts.
And that is the only essential macro forecast you must make for yourself.
What’s This Indicator Telling Me Now?
The first week in June saw claims rise +27,000 to 229,000. The previous week’s level was revised up by +2,000 from 202,000.
If the U.S. labor markets average 230,000 in initial unemployment claims each week in June, expect to see roughly a -20% decline, or +320,000 for June Payrolls additions.
If that comes to pass, that means the end of the world is not here.
Stock traders will breathe a sigh of relief.
It is that easy.
Warm Regards,
John Blank
Zacks Chief Equity Strategist and Economist