Like clockwork, the Bureau of Labor Statistics’ (BLS) monthly “Employment Situation” report dominates financial headlines the first Friday of every month. Many view payroll changes and the unemployment rate not only as a real-time economic snapshot, but as a driver of future growth—and, by extension, stock market trends. Yet Fisher Investments’ research shows employment trends don’t predict the economy or stocks—labor markets move well after economic trends.
Labor market conditions are a lagging economic indicator. Fisher Investments’ research shows economic growth begets hiring, not the other way around. Consider how a company executive might weigh when to add headcount as an economy emerges from recession. Hiring new employees is an investment of both money and time—considering hiring expenses, salaries, training and other costs. It takes time to get a return on these up-front costs. The executive’s team can merely speculate on future demand, so the risk of investing in additional labor on unknown conditions is high. This typically leads them to delay hiring until consumer demand forces their hand and they require additional labor to meet it. Many successful executives find innovative, non-hiring solutions first.
This pattern usually works amid economic downturns as well—if a recession occurs and firms must cut costs, executives will typically refrain from layoffs until there is no other alternative. For one, when they let workers go, prior investments in developing talent get wasted, and replacing those employees later won’t be cost-free. There is also an emotional aspect to layoffs. In concert, these factors generally motivate businesses to focus on cutting other expenses first. This can include slowing expansion plans, minimizing overhead costs, slashing inventories, slowing marketing and advertising efforts, or reducing bonuses and other benefits.
In short, monthly jobs reports show what the late-lagging labor market just did, not what it is about to do. Stocks, by contrast, lead the economy—they pre-price the economic trends that eventually drive hiring. Historically, stocks begin recovering from bear markets well before the economy resumes growing and payrolls increase. Exhibit 1 shows historical bull market start dates compared to when US economic growth and payrolls began recovering.
Exhibit 1: Bull Markets Precede Economic Growth, Payroll Growth
In the same vein, bear markets usually begin before recessions start and job losses roll in. When forward-looking stocks shift from a bull market to a bear market, it is common for recession to follow. Stocks pre-price the upcoming recession’s economic contraction, falling before economic output begins contracting.
Exhibit 2: Bear Markets Precede Recessions, Payroll Losses
Stocks are efficient discounters of widely known information. They preemptively priced in the economic recovery or downturn each jobs report confirmed—often several months before its release. In Fisher Investments’ view, investors who waited for better payroll figures to buy stocks risked missing the bull markets’ initial rises—limiting their portfolio’s compound return in the long run.
Stocks rise on expected economic growth, which Fisher Investments believes doesn’t depend on a growing labor force. Many pundits argue high unemployment deflates consumer spending, hurting corporate profitability, slowing economic growth and eventually punishing stocks. This idea may seem intuitive, but Fisher Investments thinks it is mistaken. Yes, consumer spending is a large part of America’s economy—currently around 68.5% of GDP. [1] Yet job growth doesn’t drive spending. Personal consumption is pretty inelastic—meaning it doesn’t fluctuate much regardless of the economic environment. Consumer spending’s share of GDP even rose during recessions in 2007 – 2008, 2001, 1982 and 1973 – 1975 as business-related categories plunged. [2] Most consumer purchases are staples and necessary, recurrent services, cushioning consumption—even in a weaker economy. Other factors, like business investment or trade, generally drive cyclical shifts in an economy as companies get lean and mean to survive anticipated tough times.
This isn’t to say Fisher Investments thinks investors should ignore unemployment data. When reports emerge, reactions from politicians, economists and market commentators can both reveal and influence investor sentiment more broadly. But that only gives you a look at how low the bar for reality to beat expectations is—not how reality will go.
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[1] Source: Federal Reserve Bank of St. Louis, as of 4/28/2022. Shares of gross domestic product: Personal consumption expenditures.
[2] Ibid.