Why investors should care about the jobs market

When investing, analysts and economists alike use an array of tools to try and assess what direction markets and the economy are heading. One of these is the jobs, or labour, market.

The jobs market is known as a leading indicator. That means it’s used as a predictive tool to forecast what direction the market and economy is heading, rather than showing an aftershock for something that’s already happened. It’s important to remember, the jobs market alone isn’t enough to tell us what direction we’re heading, but as we’ll soon find out, it has its merits.

Looking at the US jobs market, recent data shows resilience as unemployment continues to fall. UK unemployment is also at historic lows, despite the backdrop of economic uncertainty.

Now’s an important time to look at the jobs market. While lots of investors are predicting a recession as we enter a downturn in the economic cycle, some indicators aren’t following, yet.

This article is not personal advice. As always, if you’re not sure about an investment decision, you should seek advice.

Employment rate and the stock market

The underlying argument here is simple. The more people with jobs, the more income flowing into people’s wallets, meaning more money available to spend in the economy. This increases demand for products and services, causing companies to increase capacity and employ more staff to do so. The cycle then repeats itself.

This should lead to companies reporting higher sales, ultimately pushing the stock market higher. In fact, if we look at the UK employment rate compared to UK stock market returns, they have followed a similar pattern.

UK employment rate versus FTSE All-Share returns

Scroll across to see the full chart.

Past performance isn’t a reliable indicator of future returns. Source: ONS, 01/07/22 and Refinitiv, 05/10/22. *All aged 16-64.

The trend is quite clear. Although the more frequent stock market’s fluctuations can be attributed to other shocks outside of the jobs market, such as the geopolitical conflicts and high energy prices.

On top of that, during Covid-19 the UK government’s furlough scheme and stimulus both impacted the jobs and stock market. This resulted in artificially higher employment rates and to some degree, a higher stock market.

But as the famous American Economist Milton Friedman said, “the business of business is business”.

What he’s referring to here is, for a business to be successful, it’s necessary to do things that might go against its social responsibility. This includes things like company-wide layoffs. As we’ll see, that’s exactly what’s starting to happen.

FAANG stocks are taping the hiring brakes

Monitoring employment levels is helpful, but this data only goes so far and is backwards looking. Keeping a watchful eye on how the largest companies in the world are positioning their recruitment is another useful indicator to the health of an economy.

Typically, large companies with operations around the world have a good scope for how demand is faring in the economy. That’s testament to their size and reach, and staff costs can soon add up when revenue doesn’t follow.

That’s partly why FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have all announced hiring slowdowns and potential layoffs so far this year. Lots of other large technology companies are following suit.

But it’s not just the well-established technology companies exercising this. Newly minted companies like start-ups are also cutting back on headcount as they begin battening down the hatches for survival. Start-up companies typically have less secure revenue streams, so when times get tough, something has to give.

Start-up layoffs since Covid-19

Source: Layoff.fyi, 07/10/2022.

The above offers a small insight into the state of the economy right now. As soon as employers see demand waning, reducing the excess baggage (employees) is a quick way to keep costs intact.

But as recent US jobs data suggests, the labour market remains resilient with job gains in areas such as hospitality and healthcare. The recruitment industry can tell us why.

Recruiters have all cylinders firing

Typically, recruitment companies can suffer during a recession as less companies look to hire, instead deciding to scale back recruitment to weather the storm. But this time seems different.

PageGroup, the specialist recruitment company responsible for Michael Page and Personnel Page in the UK, saw the divisions grow 24% and 62% respectively in the first half of 2022. This is a stark contrast to what’s expected during an economic downturn. Of course, there’s no guarantee this will continue.

At the group level, both revenue from temporary and permanent jobs were ahead of pre-pandemic levels, highlighting the rising demand for employers looking to recruit. A similar story can be told for Hays, another global recruitment specialist.

PageGroup Revenue from Temporary and Permanent Jobs

Source: PageGroup interim results, 2018-2022.

PageGroup attributed this rise in part to an imbalance between the supply and demand for workers, with demand outstripping supply.

But recruitment companies can quickly fall prey to a waning economy. If employers start pulling back on new job openings and cutting recruitment costs by looking internally, the outlook could soon turn pessimistic. PageGroup has already acknowledged a “slight slowing” in the time it took to hire in July. This is an indication employers aren’t making decisions as quickly as they used to.

This is important because if recruiters are still performing while in the current economic environment, the economy must still be in need of jobs. This indicates demand in the economy isn’t slumping as much as people might expect.

What this means for investors

The market is a forecasting machine, often trying to predict what the future looks like and discounting that to today. The level of employment can play a key part in this. Low unemployment rates today tell us companies are looking to grow to match the level of demand they see. The reverse is true for high unemployment.

But as we’ve seen, on a more granular level, keeping an eye on large companies with global operations can also help us understand where the economy could be heading. Businesses don’t take staff layoffs lightly, often using it as a means of last resort. This can provide a good indicator to a potentially large, long-lasting downturn on the horizon.

Hiring freezes are slightly different. This can indicate the market conditions aren’t favourable right now, but not bad enough for full scale redundancies.

Whether you’re an investor wanting to get a grip on where the market and economy could be heading, or interested in reading about global companies, we’re here to help. We offer research on some of the biggest companies in the world and provide you with the information you need.

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