US Mar. Employment Report: While NFP & U-rate are important, aggregate weekly hours is the one to watch

This Friday the US Bureau of Labor Statistics will release their March Employment report. This is of particular significance because it should be the first data point in 2014 which will not see any ‘weather-related’ effects. If another strong report is released, the Fed could rest soundly knowing that their decision to shift to a qualitative stance was the correct one and that their current pace of QE tapering will remain on course.

While much has been made about the role that weather has played over the past few months, we believe its impact on the two headline numbers the BLS produces (NFP and the Unemployment rate) has been dramatically overstated – As a result, now that the bad weather has subsided we do not envision a major ‘payback’ to the headline March employment figures. That being said, when we look at how the BLS states “bad weather” influences the numbers, we have identified a key area where a rebound due to improving weather may be seen.

“In the establishment survey, the reference period is the pay period that includes the 12th of the month. Unusually severe weather is more likely to have an impact on average weekly hours than on employment. Average weekly hours are estimated for paid time during the pay period, including pay for holidays, sick leave, or other time off. The impact of severe weather on hours estimates typically, but not always, results in a reduction in average weekly hours…In order for severe weather conditions to reduce the estimate of payroll employment, employees have to be off work without pay for the entire pay period. Employees who receive pay for any part of the pay period, even 1 hour, are counted in the payroll employment figures.”

Accordingly, while most of the media and journalists on Friday will be looking at the headline NFP number or the unemployment rate, it may be more prudent to keep an eye on the US Index of aggregate weekly hours. Some argue this is one of the key metrics the Fed should be using to determine the health of the labor market, rather than the unemployment rate or headline NFP number, because it measures the total labor required to produce real GDP. The rationale behind this is that an employer is more likely to scale back or increase an employee’s number of hours worked before deciding to add or reduce the number of people employed; hence some believe it is a leading employment indicator, however for these same reasons it is also more susceptible to a ‘severe weather’ impact. If weather played a role in impacting US employment over the past few months, then it is plausible to expect this metric to rebound back towards levels witnessed in the latter part of 2013, and thus investors could have more confidence that the US economy is heading in the right direction.

Source: Bureau of Labor Statistics, FOREX.com