Is the Labor Market Strengthening Despite Economic Contraction?

jobsThe health of the labor market is perhaps the most-watched facet of any economy. Employment data can lead to a thousand economic insights, allowing investors to make more informed decisions about market conditions. When job growth is slow or negative, interest rates are likely to decline — as we have seen over the past few years — boosting stock and bond prices as a result. When job growth is high, then the threat of wage inflation rears its head, interest rates may rise, and bond and stock prices would react by falling.

Compounding the importance of employment data is the Federal Reserve’s decision to link its monetary policy action to the U-3 unemployment rate, currently sitting at 7.8 percent. The Fed, which brought the funds rate down to nearly zero in 2009, has said that it will continue buying $85 billion worth of assets every month until labor market conditions improve, meaning unemployment hits about 6.5 percent.

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

On Friday, the Bureau of Labor Statistics will release the Employment Situation report for January, which is what could change the official unemployment rate if the numbers are strong enough. Meanwhile, market participants will digest the ADP National Employment Report, which was released on Wednesday and provides a snapshot of the employment situation based on transactional payroll data…