This article was originally published by Zacks.com.
Every investor understands the intimate relationship between the economy and stock market.
Healthy Economy Ahead = Rising Stock Prices
Faltering Economy Ahead = Look Out Below!
Unfortunately, every month there are countless economic reports to sort through. Often they have conflicting information about the trend in place. And to make matters worse, my fellow economists never seem to be in agreement.
So what is an investor to do?
You must learn to pass judgment on the U.S. economy yourself. Gladly, there is a simple system I use that does very well in this regard.
The only indicator you need is...
Non-Farm Payroll data!
There is no second place here. Why? Monthly payroll data gives the best read on the nation's employment situation. As such it is a comprehensive "co-incident" indicator in economist-speak. This means it accurately takes the current pulse of the entire U.S. economy, without any further help.
One thing you should also understand: Governments create this number for their own consumption. Our President and National Security Council, among others, get the monthly payroll number a day or two before stock markets do. That is how important it is.
For an investor in stocks, the national payroll number is the best insight you have into how ALL companies are doing. Simply stated; When companies are collectively prospering they are inclined to boost their payrolls, which boosts the payroll of the nation, which boosts the economy further.
The Federal Government publishes this information the first Friday of each new month at 8:30 a.m. ET.
The good, the bad and the ugly
To figure out what a "good" payroll number is, we need to turn to the Civilian Labor Force number of 150 million. It grows at 1% a year. That means 1.5 million people come into the U.S. work force each year. Divide by 12 months and we have +125,000 as the "lukewarm" number.
Below +125,000 and the economy is losing the chase.
Above +125,000 and the economy is doing OK.
Above +200,000 is the preferred number for an economy with 3%-plus real GDP growth.
The other figure to keep in mind is +/- 80,000. That is what is known as the "standard error" of payrolls. When the U.S. economy gets an early reading below +80,000 in a preliminary Payroll number, we could actually be in a contracting economy and not know it yet.
Something below -10,000 from the Revised Payroll number is where you start to worry. It is important to wait two months in order to see two consecutive actual negative Revised Payroll numbers, because you don't want to make a huge investment decision based on a faulty statistic.
John Blank is the Chief Equity Strategist for Zacks.
The information supplied above by Zacks Investment Research Inc. contains opinions based on factual research which may or may not be accurate. Neither Zacks or Intellisphere will assume any liability for losses from investment decisions based on this information.