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A Focus on Employment

The Fed is most concerned with keeping a tight lid on inflation. Interest rate market analysts pay close attention to a multitude of measures of economic activity under the assumption that when economic activity increases to certain levels, inflationary pressures become imminent.

June employment data will be released on Friday morning. The employment data provides very important information about whether the economy is overheating to the point that inflationary pressures may increase. The logic is that as economic activity continues to grow and fewer people are left unemployed, employers have a tendency to bid up employee wages. The employment report provides an abundance of information for almost every sector of the economy. Not only does the employment report give basic employment payroll statistics for the major working sectors, it also provides the average hourly earnings and the average workweek. Using this information provided by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, economists estimate many other economic indicators such as industrial production, personal income, housing starts, and GDP monthly revisions. Since there is little data for economists to base their estimates on, the margin of error for the estimates tends to be high. As a result, the employment report can cause substantial market movements. The BLS compiles data from two unrelated surveys that they conduct, the household survey and the establishment survey, in order to complete the employment report. This explains why sometimes there is an unexpected divergence between the unemployment rate and payrolls figures each month.

This week's employment data will provide valuable insight into factors the Federal Open Market Committee will use to make future rate decisions. Employment strength may prompt the Fed to raise short-term interest rates. However, if employment begins to weaken, the Fed may seriously consider some rate cuts and mortgage interest rates may get a much-needed reprieve.