A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

December 15, 2014

The ups and downs of job growth
US Nonfarm payrolls: 3-month average change, rolling monthly basis

chart

Source: Bureau of Labor Statistics via Bloomberg, as of 11/30/14. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • New job creation has improved over the past few months; 278,330 new nonfarm payroll positions were added on average each month from September to November— the best 3-month streak in more than four years.
  • November alone saw 321,000 new jobs created—the best monthly gain in nearly three years. That gain topped estimates by a wide margin and extended to ten the number of consecutive months that jobs growth exceeded 200,000.
  • There are 2.7 million more nonfarm payroll jobs now than there were in November 2013; clearly a positive for the US economy—consider the acceleration in retail sales over the past several months.
  • But the impact could be more mixed for investors. Stronger growth would likely prompt a reassessment of many things, including the outlook for earnings and Federal Reserve (Fed) policy.
  • After all, if stronger growth and more jobs bolster revenue growth, but shrink profit margins due to increased compensation costs—how does that change the prospects for earnings?
  • And does the interest rate outlook become more uncertain if faster jobs growth brings the US economy closer to full employment—but inflation remains below the Fed's target of 2%?
  • Of course there's no guarantee that the pace of economic activity next year will be significantly higher—in fact, the consensus outlook still seems to be for a continuation in the range that's been seen throughout the recovery.
  • Yet if this consensus becomes challenged by stronger growth—or weaker growth for that matter—then investor expectations about interest rates and earnings will shift (even if only marginally) and that could lead to more volatility—but it's just those shifts in investor expectations that can create opportunity for astute investors.

The chart:

  • The chart shows the 3-month average change in nonfarm payrolls on a rolling monthly basis over the past five years.
  • The 3-month averge in November was 278,330, the best since May 2010.

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Previous Editions

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Poll

What would be the best news for markets for the remainder of the year?








Poll

What would be the best news for markets for the remainder of the year?

Strong US corporate earnings validate US economic expansion
(34%)
Strength in the US dollar convinces the Fed to keep short rates low longer
(11%)
European Central Bank bond buying rekindles growth in European Union countries
(47%)
Growth in China strong enough to leave room for financial system and structural reform
(8%)



Previous month Poll

Which Asian country will have the strongest growth in the coming year?

Japan, as Shinzo Abe's policy initiatives take hold
(17%)
India, as Narendra Modi's new government enacts changes
(45%)
China, as Xi Jinping's reforms promote a stronger financial sector
(17%)
South Korea, as President Park Geun-hye's plan to boost growth bears fruit
(21%)