The unemployment rate is probably the most widely watched economic indicator. In part, that’s because the Federal Reserve ties its policies to the rate.
That makes the unemployment rate important to the bond market. Interest rates affect the fair value of stocks. In the stock market, traders buy or sell immediately after the monthly update to the number.
Economists also watch the numbers. Many of them try to forecast changes in unemployment. One of the tools they use is data on the amount of money employers pay in taxes.
As you know, employers withhold money from your paycheck. They deposit these payroll taxes a few days after they pay employees. The Daily Treasury Statement offers real-time data on the amounts of deposits. This indicator shows unemployment could be rising.
The chart shows the change in deposits compared to a year ago. Data is seasonally adjusted to account for swings in hiring and firing. For example, the school year requires an adjustment. Otherwise, employment data falls off when classes end, and then jumps when students go back to school.
The trend in payroll taxes is down. This means employers are paying less to employees.
The chart shows that there is serious weakness in the employment market. There are several possible causes for the decline.
One possibility is that employers aren’t hiring as much as they were a year ago. Data shows the pace of hiring slowed over the past year.
It’s also likely employers are paying employees as little as possible. Federal Reserve data shows consumers are spending more on necessities and have less income for other items. This confirms wages are growing slowly, if at all.
This is something to watch for stock market investors. Bear markets begin after unemployment starts rising. We aren’t there yet, but we need to be watching for a change in the unemployment rate.
Michael Carr, CMT
Editor, Peak Velocity Trader