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Leading Employment Indicators Suggest New Highs Ahead

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    September 12, 2013

    Following the leading indicators of employment have been great tools towards helping investors stay on the right side of the investment tracks, and why I check in on them from time to time. I first checked in on various employment indicators in March (see link), which argued for higher stock prices and in May ran an update (see link) that suggested higher stock prices into the fall. Those same indicators are calling for further employment gains heading into 2012 and suggests the unemployment rate could reach 6% by next year, all of which would obviously be bullish for the stock market.

    Leading Employment Indicators Suggest New Highs Ahead

    Shown below are two indicators, US Job Openings and the Conference Board Employment Trends Index, which both suggest payrolls continue to climb heading into the spring of 2014.

    lei
    Source: Bloomberg

    Another leading employment indicator is the Fed’s Senior Loan Officer Survey, which measures the percentage of banks tightening lending standards for Commercial and Industrial (C&I) loans to small firms. The survey leads employment growth by one quarter and suggests that payroll growth accelerates from present levels heading into the end of the year.

    nonfarm payrolls
    Source: Bloomberg

    Another encouraging development was the surge in the National Federation of Independent Business (NFIB) Hiring Plans Index which rose to the highest level since early 2007. This is significant as the Hiring Plans Index (shown below in red inverted and advanced) leads the unemployment rate by several months and suggests we approach a 6% unemployment rate sometime in 2014.

    nfib
    Source: Bloomberg

    Conference Employment Trends Index Suggests No Risk of Recession

    Looking at the long-term history of the Conference Board’s Employment Trends Index paints a very encouraging picture. Shown below is the Employment Trends Index along with its 20-month moving average (20-Mo MA). As long as the index is above its 20-Mo MA the economy has been in expansion mode and the stock market is in a bull market. However, several months before the onset of a recession the index falls below its 20-Mo MA serving as an early warning for investors. The Employment Index also tracks the stock market closely, though with less volatility, and as long as the Employment Index is heading higher dips in the market typically serve as good buying opportunities.

    conference board employment trends index
    Source: Bloomberg

    Another support for the equity markets is the continued decline in the 4-week moving average for jobless claims. Jobless claims and the stock market have a great inverse correlation and so spotting divergences between the two can be helpful at spotting turning points in the market. Given the 4-week moving average for jobless claims hit a new cycle low (inverted in red below) last week, the risk of a major market peak for U.S. stocks seems highly unlikely.

    jobless
    Source: Bloomberg

    Summary

    Leading employment indicators have done an excellent job this year on keeping investors aligned properly with the market’s primary trend, which continues to be a bull market that began in March 2009. Currently, leading employment indicators are suggesting further payroll gains ahead and even suggest the possibility that the unemployment rate sees a 6% print sometime in 2014. Given the bullish outlook for employment, it is quite likely the S&P 500 will survive to see a five-year bull market.

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    Image: Flickr (licence attibution)

    About The Author – Chris Puplava, Financial Sense Online

    Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.

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