Breaking Down the Employment Report

November 18, 2008

An often overlooked tool in your research arsenal is the monthly Employment report.  On the first Friday of every month, the U.S. Bureau of Labor Statistics (BLS) publishes a report of job statistics.  Most watched among the data are the Change in Nonfarm Payrolls and the Unemployment Rate.  That's about as far as most investors look, as the "headline" numbers seem to carry a lot of weight with the media.
The real value of the monthly data lies in the details.  One of my main investment starting points is relative sector strength.  Normally, I watch earnings and stock price action, and compare among the various industries to find leaders.  Employment data is another tool that provides detailed insight into sector strength.  The full file, published by the BLS, contains a plethora of employment data that should be reviewed every three to six months for the active investor.  There is a lot of information in there, so today I'm going to break it down into useful chunks.
Why look at jobs?
Imagine you are the CEO of a medium-sized company.  Business was slumping last year, but it's starting to pick back up.  You realize that you don't have enough employees to effectively deliver your product or service (maybe you had to lay off part of your work force during the last business downturn).  You decide to add 5% to your workforce.  Now that you have staffed up your company, business thrives as you expected.  Three months later you report surprisingly good earnings, and the Wall Street analysts upgrade your stock.  You invested in the overhead cost of additional employees because you expected business to improve.
That's what we call "following the money".  No business owner will hire extra employees for no reason.  There is always a business driver.  By watching for trends in the monthly employment report, you can get an insider's view of sector and industry trends.  This valuable data tells you where the hiring managers are adding to, or reducing, headcount, long before the results are reported in quarterly releases.  Use this knowledge to buy favorable sectors, and more importantly, stay out of difficult ones.
The Top-Down Approach
Since this is my first post regarding Employment, I'll start with a high-level view of the nation's job situation.  All data are taken from the October, 2008 report, and is subject to revision by the BLS in the future.
Sector Level:  The Very High View
Total Nonfarm payrolls for October were 136,899,000, down 240,000 from the month prior.  The mix between Private and Government employment is depicted in the graph below:
Within the Private Sector, the BLS categorizes jobs as either Goods-Producing (Manufacturing, generally), or Service-Providing (everything else).  The current proportion of manufacturing to all private jobs is 18.5%, down from 19.1% a year ago.  This continues an historic trend over the past few decades in which the US economy is becoming less and less manufacturing-based. 
All government jobs are classified as Service-Producing, but I'm quite sure we could debate the veracity of that.  
Nonetheless, I present below two charts which show the 12-month change in these components, both in terms of percent change and absolute number of jobs gained or lost:
The first colum represents all Nonfarm jobs.  We lost over 1 million jobs in the past 12 months, which is almost 0.8% of the year-ago value.  Moving to the right, we have data for all non-govenrment employment, then only government, then manufacturing, services (including government), then finally only private services.  The data are discouraging from an economic point of view, as the only sector with job growth is the government. 
Sub-Sector Level:  The data is exposed
Now that we have a high-level understanding of what the current employment picture looks like, do we run out and invest in the government?  That's probably not the best use of your money, considering we already "donate" through our taxes.  Let's break down the Private Sector to try to find strengths or weaknesses that will assist us in our investment decisions.
The BLS classifies 11 Sub-Sectors within the report: 
  • 1 Government
  • 3 Private Goods-Producing (making stuff)
  • 7 Private Service-Providing

 The chart below shows us which Sub-Sectors gained or lost jobs over the past 12 months, on a percentage basis:
Now we are getting somewhere.  I've sorted the table from biggest gainer to biggest reducer.  We can now clearly see that Resources/Mining and Education/Health Services added jobs over the past year.  On the other hand, Construction and Manufacturing have been hard hit with significant losses. 
These results may seem obvious to us now, since we just went through a commodities bubble (Resources/Mining).  Health services is a defensive sector, so, sure, that should be strong now.  Construction includes residential and commercial construction, and we all know that the real estate crisis has hurt that group.  Finally, with the trough in the business cycle that we are in, we would expect manufacturing to be losing jobs.  Wouldn't it be nice to have known these trends a year ago?
The Trend Is Your Friend
Take a look at the chart below.  Here I normalize the job additions/subtractions since October 2007.  For each sector, I started with October's employment value.  For the following month, I calculate the percent change, representing job addition (positive change) or job loss (negative change).  For example, if a group had 100 people reported as employed in October, 2007, then showed an employment level of 101 in November, 2007, then the graph would go from 0% to 1% in November.
Look at November and December, 2007.  Even as far back as a year ago, you can see that Natural Resources and Mining (pink line at top) was adding jobs at a higher rate than all other groups.  Construction (yellow line at bottom) was a clear net reducer of jobs, month over month.  In fact, most groups started on a path and pretty much stayed with it.  This tells us that employment patterns do not change very rapidly, so if you spot a trend, it should be reliable, until inevitably it changes.
The interesting anomaly in this data is the brown line, "Leisure and hospitality".  This group represents performing arts, museums, amusements, gambling, recreation, accomodation and food services.  It clearly changes trend in the April/May time frame.  As the recession began to look more long-lasting, consumers cut back on this category of spending, and everything from amusement parks to casinos have, unfortunately, reduced headcount.
Industry Level:  Let's Get Specific
The second-to-last classification in the BLS report is the Industry level.  There are 24 total groups that encompass the 11 Sub-Sectors:
  • 3 Government (Fed, State, and Local)
  • 6 Private Goods-Producing
  • 15 Private Service-Providing
Looking into the Sub-Sectors reveals more differentiation among the mass of data.  The year over year change in employment is shown in the two charts below.  Again, I present the percent change as well as the actual number of positions added/subtracted.  On the bottom chart, I highlighted the 6 Manufacturing Industries (Goods-Producing, in BLS parlance).  All the rest are service industries, either private or government.
No major surprises here.  You'll notice a distinct difference in the ranking of the groups from Percent change to Employment Positions.  This is a reflection of the relative sizes of the various industries.  For instance, Health care and social assistance employs almost 16,000,000 people, so the 400,000 increase over the past year is a relatively small percentage.  Nonetheless, that's a lot of jobs added.
The mining group is highly correlated to the volatile futures market.  As spot prices for steel, gold, copper, etc. go up, the Mining industry has greater financial incentive to hire employees to expand excavation efforts.  As the prices of commodities have come down, I expect to see the rate of hiring in mining to come down as well.  It may actually show negative growth, in which case you can assume that folks are getting laid off from those mining jobs.  Why haven't we see a downturn in jobs in the mining group, despite the sharp drop in commodities since July?  Well, the data here are from October, only 3 months from the recent commodities peak.  My guess is that employers are quicker to hire for the good times than they are to lay-off as business turns.
At the bottom of the charts, we see industries which have had a net loss of jobs over the past year.  Administrative and waste services, as a group, has lost the most positions, at nearly 400,000.  The sub-industries that make up this group include employment services, temp agencies, business support services, and waste management and remediation.  With the overall decline in the Nonfarm payrolls, it makes sense that services that support business would also be affected negatively.
I have cracked open the BLS Employment report to reveal some of the information you can put together to obtain a comprehensive view of the jobs picture.  The assumption here is that thriving industries will hire to support their businesses.  The companies in those industries should, in turn, be expected to be successful in the near-term. 
I've only scratched the surface with what you can do with the data.  For instance, below the 22 Industries are over 100 sub-industries you can analyze and play with.  I hope you find this concept useful and profitable in your investing.
Dan Grill