Storytelling In The News: #142

The story of April jobs data

May 7, 2004

For at least a week, the financial world has been palpitating at the prospect of learning what number the Labor Department would announce as the status of of nonfarm business payrolls in the US for April. The number is a key element in putting together the story of the US economy, which in turn determines the flow of investments and expenditures around the world.

The importance of the jobs story

The persistent scarcity of jobs since the recession officially ended in November 2001 had been an important concern for U.S. economic policy makers, and a liability for President George W. Bush in his re-election campaign. Democratic leaders have regularly noted that Mr. Bush is the first president since Herbert Hoover to have presided over a net loss of jobs. During the first two-and-a-half years of Mr. Bush's term, the economy shed 2.7 million jobs. Since the summer of 2003, when the country began to see economic growth, about 40% of those losses have been reversed.

Underscoring this week's anxious mood, traders were worried that too strong an employment number would mean rates would rise even sooner, while a weaker payroll report could send a signal that the economic growth is falling off. Either would be viewed as negative for stocks.

Given that economists have been consistently wrong in predicting the number, suspense was in the air. In January and February, economists had predicted significant job growth, when in fact there was none. So for March they were pessimistic, only to discover that jobs had grown by a large amount - around 300,000. So for April, what could be expected? Having been wrong so often, economists were cautious. The consensus among economists was that the US economy had created 173,000 jobs during April.

The actual number announced on May 7 was 288,000 -- well above expectations. And the March number, 308,000, was revised up by 28,000.

Growth in employment is good news for the state of the economy in general, for consumer spending, company profits and for President George Bush’s re-election chances.

Good news causes the stock market to plunge

But the stock market declined sharply by 1.2% percent, as investors read a different story into the news. The prospect of rising interest rates was once again the main scapegoat for a selloff, with investors interpreting the latest upbeat jobs data Friday as more evidence that the Federal Reserve would soon take action.

Thus the jobs data enables the financial markets to reinforce the story that the economy is finally growing robustly, but only thanks to the extraordinary stimulus from the historically low interest rates and the budget deficits. The story is positive but it now becomes inevitable that these artificial stimuli will be removed, with the likelihood that interest rates will move up and financial resources available to pump up the stock market will be in shorter supply.

Neophytes might imagine that the stock market responds positive to good news. Seasoned observers realize that the stock market responds, not to the information in the news, but the story that it generates. Hence apparently good news leads to a less optimistic story for stocks.

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