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What weak unemployment figures mean for your investments

September 19, 2012

| MoneyRates.com Senior Financial Analyst, CFA

When the U.S. Bureau of Labor Statistics (BLS) released employment figures for the month of August, the report was widely seen as disappointing, though it was right in line with job creation figures from recent months. The problem is, those recent months represent a disturbing trend for the job market.

Employment numbers can be a little erratic from month-to-month: Sometimes short-term hiring or a strike can skew the numbers up or down. However, looking at a rolling, three-month average of employment numbers helps smooth out the short-term anomalies and reveal what kind of trend is developing.

With the election coming up, jobs are likely to remain a hot topic in the weeks ahead. The strength of the job market may not only determine what happens in Washington, but also what your investment portfolio looks like by the end of the year.

A weakening trend

The BLS reported that a net total of 96 thousand jobs were created in August. As erratic as monthly numbers can be, this figure happened to be very much in line with the three-month average, which was 94 thousand. The problem with that is this number represents a weakening trend.

From September of 2011 through April of this year, the three-month moving average for new jobs stayed above 100,000, and it was even above 200,000 throughout the first three months of this year. However, the three-month average hasn't crossed above 100,000 since April.

There was a similar slump last year, when an eight-month streak of three-month average employment numbers over 100,000 was broken. However, whereas that slump lasted for just two months, the current one is now at four months -- and counting.

Investment implications

This weakening trend in employment can have investment indications that might factor into your decision-making. Here are some examples:

  1. Savings account rates. A weak employment outlook means you should expect low savings account rates to stick around for a while longer. You can do better by shopping around, especially if you look at online banks. If you don't have an immediate need for the money, you could do better with long-term CD rates. Try to hedge that move by finding one with a relatively mild penalty for early withdrawal, in case rates start to rise before the term of the CD is up.
  2. Stocks. The stock market has actually been quite strong lately, as concerns over the weakness of the economy have been offset by the prospect of interest rates staying low, which bolsters stock valuations. Looking forward though, with little room for interest rates to go lower, stocks are going to need some consistent economic growth to drive earnings before they can be counted on for a sustained rally.
  3. Bonds. Bonds are probably the least attractive proposition of all three asset classes discussed here. Interest rates are so low there would seem to be little upside for bonds, and plenty of downside.

Short-term investors may be pleased that this economic weakness has led to further monetary stimulus from the Fed, but in the long run the investment environment would be much healthier with higher growth and higher interest rates.

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