The May Jobs Report Matters Little to Your Portfolio: Here’s Why

Source: Thinkstock

Source: Thinkstock

On Friday morning the May Jobs data was released by the U S. Bureau of Labor Statistics. Investors were generally pleased to see that the number of non-farm payrolls increased by 217,000, and the jobless rate remained flat at 6.3 percent.

Nevertheless this data likely matters very little to your portfolio with respect to its future cash-flow generation. There are three reasons for this.

The first is that the unemployment rate is a highly politicized data point, but it doesn’t have much significance regarding the performance of most individual companies. It makes for a good headline, and it gives impetus to the discussion regarding political policies, but in reality whether or not people have jobs now doesn’t matter very much to the outcome of many businesses. Remember that one of the driving forces behind the rising profits for many companies recently has been that they have cut costs, and they do this in part by cutting jobs. In fact we have seen many instances in the past where a company’s stock has risen because it has eliminated jobs. There are exceptions such as companies that issue paychecks [e.g. Paychex (NASDAQ:PAYX)] and in fact if you want to bet one way or the other on joblessness you should have this stock on your radar.

Second, the “headline number”—the 6.3 percent that was reported—is just one of many numbers released by the Bureau of Labor Statistics. This is what is known as the “U3” number, and it counts people who may be employed, but who have jobs that don’t reflect their skill sets. For instance a doctor who has been laid off who must work at McDonalds (NYSE:MCD) in order to make ends meet. His quality of living has declined, and furthermore he is seeing the hundreds of thousands of dollars and thousands of man-hours go to waste as those skills are not being used.

Fortunately the Bureau of Labor Statistics calculates this data: such people are known as “underemployed.” The underemployment rate, or the “U6” figure came in at 12.2 percent in May, which is still elevated. One interesting statistic to point out is that since the financial crisis both the U3 and U6 numbers have come down, but the spread between them has widened. This means that since the financial crisis jobs are coming back, but many jobs that require unique skill sets and which pay well have been replaced by jobs that require fewer skills and which pay less on a more permanent basis.

Finally, the unemployment data is specific to the United States, but most “American” companies are American only insofar as they are headquartered here. They are, in fact, global businesses. This applies particularly to large cap companies such as those found in the Dow Jones Industrial Average. Companies such as McDonalds, Exxon Mobil (NYSE:XOM), and Coca Cola (NYSE:KO) get most of their revenues abroad. They also make most of their investments abroad. It follows that these companies are impacted minimally if a few Americans get or lose jobs.

With this being the case, you shouldn’t fixate on the unemployment report so much. As an investor you need to figure out which macro-economic factors impact the companies that you own, but in most cases the U. S. unemployment rate will not factor in, or it will factor in so minimally so that it will not impact your decision making process.

Disclosure: Ben Kramer-Miller is long Exxon Mobil.

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