×

Nonfarm payrolls can tell you a lot more than just job numbers

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

Trading floors always used to buzz with a combination of anticipation and a little bit of dread the first Friday of the month whenever U.S. payrolls numbers were released.

These days non-farm days have been relegated to the realm of trading floor sweepstakes and post-Friday lunch indulgence.

While the headline number still generates some excitement (mainly from those who are in sweepstakes), the impact it has on markets has diminished over time, with some people dismissing the print as a random number generator.

Take last Friday's headline number as an example. In March, the U.S. economy created 103,000 jobs, about 90,000 lower than expectations and mainly due to weather distortions. This was on first glance disappointing but when taken with the previous month's number (326,000, also an anomaly), the two-month average is still north of 200,000 while the 12-month rolling average is still about 190,000

This is very high for this point in the economic cycle as the U.S. is fast approaching peak employment and in its ninth year of expansion. Many analysts expect the trend to slow. Erik Nielsen, chief economist at Unicredit, expects the trend to drop to around 150,000 over the next couple of years.

The other key indicator in the report, the unemployment rate, has also been remarkably stable and has been holding in around 4.1 percent.

These days investors are more focused on the average hourly earnings print which provides valuable clues on wage growth. So much so that a "rogue" 2.9 percent print for January was enough to send fixed income markets into a tizzy. More crucially though, is that this number is still far from pre-crisis levels.

This has left economists scratching their heads about whether or not the Phillips Curve (which implies a higher level of inflation for this rate of unemployment) is broken, and equally has left equity investors happy that this era of decent growth and low inflation is sacrosanct (for now).

This conversation has dominated debates for at least a year now, and perhaps the answer is a lot simpler than we would like to admit: there is still hidden slack in the labor market.

One way to measure that is by looking at the underemployment rate, or U-6, which is a broader measure of unemployment that includes discouraged workers and those holding part-time positions for economic reasons. In March, it fell to 8 percent, back to November levels and its lowest reading in 11 years.

Therefore, the current U.S. labor picture continues to look healthy and most analysts are sticking with calls for another two or three Federal Reserve rate hikes this year. However, a lot of information can still be gleaned if you look under the headline employment bonnet and should give valuable clues on the inflationary outlook over the next crucial months of the tightening cycle.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.