Reading The Tea Leaves

As everyone probably knows by now, the housing market is linked to employment numbers. As Americans go back to work, the number of foreclosures will decrease, inventory will shrink, and home prices will stabilize. But when analyzing job numbers it takes a discerning eye to separate the wheat from the chaff!

How confusing! Reported last Friday, 54,000 jobs lost in August and the unemployment rate increases from 9.5% to 9.6%. And how does Wall Street react? By going up in value over 100 points! What did investors see that others may have missed?

The important monthly statistic to keep our eyes on is the job creation numbers, but more specifically jobs created in the private sector. For instance, when the August Jobs Report shows a net loss of 54,000 jobs, that is the sum total of private and government jobs. It is the difference between the 67,000 jobs created in the private sector less the 121,000 jobs being lost on the government side, the vast majority of which were temporary Census workers. And we will have more government job losses in the September report, with 82,000 Census workers remaining.

Even the private sector job creation numbers can be misleading. When the jobs report says 67,000 private sector jobs were added in August it can sound like all the private businesses throughout the entire U.S. only created those 67,000 jobs. In reality, the private sector created hundreds of thousands, perhaps millions, of jobs. At the same time a similar number of jobs may have been lost. For instance in June (the most recent month this data is available) employers hired roughly 4.3 million workers, almost 600,000 in retail alone! However the net effect of hiring and loses is the 67,000 "new jobs added" that is being reported. This is what is referred to as "churn," workers coming and going into the workforce.

Also, an uptick in the unemployment rate may not always be a bad thing. As mentioned above, the August unemployment rate increased from 9.5% to 9.6%. However, this additional 0.1% is entirely attributable to the size of the workforce increasing. For example in August the available labor force increase by about half a million. In other words people who had been sitting on the sidelines, unable to find work for so long that they stopped looking, are reentering the job market as they become more optimistic about their employment prospects. It is one sign that people may be starting to feel encouraged about the labor market.

Although a good sign, the nearly 700,000 jobs created so far in 2010, and positive job growth in the private sector for the past eight straight months, are not enough to make a significant dent in our unemployment. About 150,000 jobs are needed every month just to keep up with population growth! But it is a significant improvement when compared with the prior two years of job losses. And according to economists who study this kind of thing, the current rate of job creation is happening at a faster clip than that following any recession in the past twenty-five years. While appearing to be headed in the right direction, it may take years to recoup the millions of jobs we've unfortunately already lost. But it's one step at a time, and investors seem to like the direction our baby steps appear to be taking us - and avoiding a double dip recession. At least so far.

So if you want to forecast the housing market one good way is to watch the monthly job reports. And read between the lines!

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