The government releases economic indicators and surveys every month. Knowing the market indicators and monitoring the economic releases helps interested parties to be better prepared to foresee and respond to future market developments. They include employment, investment, consumer activity, and inflation. For the purpose of this report, only employment analysis will be done. Employment is a major indicator of the economic performance of any country. An increase in unemployment rates is hazardous to the economy. Employment affects many other sectors in the economy given that all sectors need employees. A change in employment is dispersed in all economic sectors.
Understanding what the economic and market indicators affect markets should not be the ultimate goal for market players. The goal is to know how to interpret the economic indicators and deciding their probable market impact. Besides the fixed level of an economic indicator, two other main factors to consider are the tendency in the indicator and the market anticipation for that indicator. When they are taken together, they usually determine the market reaction to a certain economic or market report. Learning to look forward to the market’s reaction to a variety of indicators needs a careful observation of financial markets and knowledge in deducing these reports. This report is a summary of important economic releases September 4 and the reactions to it.
Five years after America emerged victorious from a recession, the economy seems to be on track as proved by the massive recent job gains and decreasing unemployment rates. Since the year 2008, the unemployment rates have reduced to 6% for the first time. From the report, it is evident that the Americans are still discouraged by their job prospects to the extent of loosing contact with the employment system. However, the unemployment rates were 6.1 percent down from 6.2 percent in July. However, 280000 jobs were added into the economy in the month of August, which is above the 215,000 that was being expected by economists. For the past twelve months, 213,000 has been the average job growth (Bureau of Labor Statistics 1). This release was better than what was expected. The 0.2 percent decrease in unemployment is very encouraging. Over the few months, the numbers of employees being added into the economy have been high meaning the economy is growing.
Payroll Employment and the Unemployment Rate
After a strong stretch of hiring this year, the payroll growth has averaged 224,000 over the last three months. However, this is down from a monthly average of 228,000 in the first half of 2014.the nonfarm employers added 248,000 jobs in this month as the unemployment rates reduced to 5.9 percent. Wage growth however remains sluggish. Wages rose by 2 percent, which is in line with previous year’s average. This indicates a slack in the labour market. It is notable that the wage growth has been constant for some time meaning that as the economy accommodates more employees, it is unable to handle an increase in wages. This signals a slow growth in the labour market. However, the increased employment rates signal a growth in the overall economy.
The labour force participation rate reduced by 62.7 percent in August from 62.8 percent in August. Before the 2007-2009 recessions, participation rates began falling but have stabilized this year. This signals low encouragement on the part of the labour force. The unemployment has lost hope and no longer participates in job search. The number of people who have been unemployed for more than six months reduced by 1.2 million people over the last one year. However, the figure for the month of August was 3 million who makes up 31.9% of the total people unemployed(Bureau of Labor Statistics 3).
United States’ employment growth was slow in August. People expected that the unemployment rate would increase, but the unemployment rate fell to almost an eight-year low and wages remained constant. The unemployment rate reduced by 0.2 percent, and the number of unemployed people fell by 8 million these figures kept hopes alive of a Federal Reserve interest rate increase later in the month. Nonfarm payroll went up by 173,000 in the previous month after an upwardly amended gain of 245,000 in the month of July. The gains in August were the most negligible in the preceding five months because the factory industry experienced the most employment loss since July 2013.
Source: Bureau of Labor Statistics report
The sector with the newest jobs was the business service sector with 81,000 jobs added. This is higher than the monthly average of 34,000. Health care, retail trade, and construction added 23,000, 35,000 and 16,000 jobs respectively. In all other sectors including the government, there was little upward change or no change at all. The average hourly earnings were down to 24.53 percent bringing the growth rate down to 2 percent(Bureau of Labor Statistics 8). The workweek was up to 34.6 percent after being 34.5 percent in the last six months.
After the release of the report, the S& p ended at a record high on 5 August. However, mixed economic data played a role in restraining overall returns for that week to 0.2 percent. The Doe Jones rose by 0.2 percent while the NASDAQ was up by 0.1 percent. The overall environment remained positive over the week as reports of increased activity in the US service and manufacturing sectors suggested that the economy was strong.
Many investors were expecting the pace of jobs increase to reduce as the recovery continues. However, there was some good news as the unemployment rate fell from 6.1 percent to 5.9 percent. Some investors also noted that the more reserved employment data makes it, the less likely that the Federal Reserve’s monetary policy board will gesture any changes to its interest rate position at its next meeting later this month. The market continues to expect that there will be no interest rate increase until the middle of 2015 at the earliest. Among the major euro zone markets, Spain’s IBEX 35 gained 3.9%, Italy’s FTSE MIB climbed 4.6%, French CAC 40 rose 2.4%, and the Germany’s DAX was up 2.9% (Bureau of Labor Statistics 6). Outside the euro zone, the Swiss SPI increased by 1.3% and the UK’s FTSE 100 was 0.5% higher, while the Swedish OMX remained constant. The report on employment and average earnings showed that the domestic economy of the U.S is good. However, when observing the Fed’s hesitation surrounding the rate increase, a few key factors must be taken into consideration.
A dollar rate increase could result in a capital flight from the equity market to the bond market). It could also have led to capital flight from up-and-coming markets like China to vibrant markets like the United States All these prospective outcomes do not lead to a sure course of action until the Fed’s communicate a clear message after its meeting. Thus far, the US market should go on having trouble. The US Bureau of Labor Statistics’ employment report had encouraging figures for the US local economy. However, the numbers were not solid enough to instigate an interest rate increase by the Fed.The doubt concerning this decision or a lack of it affected UK investors in the midst of the financial chaos in China, which has depreciated the Euro against the US dollar.
In the manufacturing sector, economic activity increased in the month of August. The August PMI registered an increase of 1.9 percent to read 59 percent from 57.1percent in July. This indicates a growth in the manufacturing industry. The August PMi is the highest reading since March 2011 when the index registered a high of 59.1 percent. However, the new orders index registered 66.7 percent up from 63.4 percent in July indicating a tremendous growth. The production index was 64.5 percent that translates to a 3.3 percent increase from 61.2 percent in July. The employment index has also grown for the 14th consecutive month. This is a good indication that the economy was growing though not at a good pace. Raw materials on the other hand an increase of 3.5 percent indicating a growth in inventories. This month PMI is led by a highest recorded New orders Index of 67.1 percent.
Among the 18 manufacturing industries, 17 reported growth in August in the following order,Plastics and Rubber Products, Furniture and Related Products, Fabricated Metal Products, Leather, Apparel and Allied Products, Wood Products, Printing Activities, Miscellaneous Manufacturing; Paper Products, Petroleum and Coal Products, Tobacco Products, Nonmetallic Products, Chemical Products, Primary Metals, Transportation Equipment, Computer Products, Machinery Equipment and Appliances Components. Textile Mills ids the only industry that recorded a contraction. Commodities that have increased in price include Aluminum, hydrochloric acid, Plastic Resin, Steel, and Stainless Steel Products among others. Commodities that have reduced at price include Corn, Copper, Natural Gas, Methanol, and Soybean Oil.
Manufacturing stretched out in August as the PMI registered 59 percent, which is an increase of 1.9 percent when compared to 57.1 percent readings of July. Augusts’ PMI reading of 59 percent is the highest reading since the month of March 2011 when the PMI registered 59.1 percent. A reading above 50 percent shows that the manufacturing industry is expanding and a reading below 50 percent indicates a contraction. In line with this, the manufacturing economy is growing tremendously.
A PMI above 43.2 percent, , generally indicates a growth in the overall economy. Thus, the August PMI indicates increase growth for the 63rd successive month overall economy. It also indicates an expansion in the manufacturing sector for the 15th successive month. The manufacturing part of the economy has been recording growth for the last months. However, the whole economy has not been recording the same growth meaning that some sectors are redundant.
The single index number for those meeting the criteria for seasonal adjustments is seasonally adjusted to permit the effects of cyclic intra-year variations ensuing primarily from normal differences in weather, differences attributable to non-moveable holidays and conditions of various institutional arrangements. All seasonal adjustment factors are subjected to annual minor changes when conditions warrant them. The PMI is a combined index based on the diffusion indexes of five of the indexes with equal weights, which are Production, Supplier Deliveries, New Orders, Employment, and Inventories.
Bureau of Labor Statistics 2015, The employment situation-August 2014. PDF File. 4 Sep. 2014.< http://www.bls.gov/news.release/pdf/empsit.pdf>
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