On Friday morning before the equity markets open, the Bureau of Labor Statistics will release their monthly report on the Employment situation. Often referred to as simply “Unemployment,” the report’s headline number – which represents the percentage of American adults who want to work but who can’t find suitable employment – tends to get the most attention.

Sometimes overlooked are the other two important figures – the number of nonfarm payrolls added during the month and the percentage change in average hourly earnings. This month however, these numbers, especially the earnings figure, might prove to be more important to the equity markets and predictions for Federal Reserve monetary policy going forward.

Let’s take a look at how these numbers are compiled, what’s expected for the September report and how any deviations from those expectations might affect the markets.

The Calculations

A common misperception is that the official unemployment rate is calculated from the number of Americans who are receiving unemployment assistance, which would be fairly simple to ascertain. But that number would exclude those who have already had benefits expire, are ineligible for assistance for various reasons or who have simply failed to apply for benefits.

So instead, the BLS conducts a monthly survey of approximately 60,000 U.S. households which is chosen to be a representative sample of the country as a whole. Through a series of questions that change based on previous answers, the BLS is able to make a fairly accurate estimate of how many Americans actually qualify as “unemployed.” They also conduct a concurrent survey of approximately 140,000 businesses called “Current Employment Statistics (CES)” to determine the change in the number of positions added and the average wages paid across all jobs, excluding deductions and benefits but allowing for a portion of overtime wages to be included.

Where the Numbers Have Been

In the August report, the unemployment rate was reported at 3.9%, Nonfarm payrolls increased by 157,000 positions and average hourly earnings increased by 0.3%. It was the lowest Unemployment percentage in well over a decade and represented a level not seen consistently since the 1960s. Low unemployment is generally seen as positive, but the slow, sustained reductions we’ve seen over the past several years is even better, since a quick dip in the unemployment rate might suggest an economy that’s in danger of overheating.

Where the Numbers are Headed

In September, the median forecasts are for an Unemployment rate of 3.8%, and increase in payrolls of 200,000, and a rise in average hourly earnings of 0.2%. Notice that that would be a month over month improvement in unemployment and payrolls but a slight decline in the rate of wage growth. For business owners, that’s a “goldilocks” scenario. It means more workers are being deployed, increasing production and presumably revenues, but that the cost of employing additional workers is not growing out of control and threatening the bottom line. Remember that as an equity investor, you are in effect a business owner, so their perspective is your perspective as well.

So tomorrow, the average hourly earnings figure is the number to watch. A greater than expected increase would represent a double threat – that corporate earnings won’t grow quite as quickly as the improved employment situation might suggest, and that the Federal Reserve will accelerate its plan for gradual tightening to head off inflation.

The Fed

Currently the Chicago Mercantile Exchange’s (CME) FedWatch tool – which is calculated from market prices on Fed Funds futures contracts – shows a 99% expectation of a 25bps increase in short-term interest rates at the Fed’s next meeting at the end of this month and a 69% chance of at least one additional rate hike in 2018. Up until now, the equity markets have taken the expectations for rate hikes in stride, especially as Fed Chairman Jay Powell has communicated that Fed moves in the near future are likely to be gradual and predictable.

An unexpected increase in average hourly earnings could upset the delicate balance that’s sent stock prices to historic highs. It wouldn’t be a total disaster by any means, but might give investors pause before adding more equity exposure to their portfolios. A number right around the expectation of a 0.2% increase will signal more good times are likely ahead.

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