The unemployment rate for October 2015 was 5.0%. When compared to the previous month’s rate, it has fallen by 0.1% and is the lowest unemployment rate since the crisis of 2008–2009. Total nonfarm payroll rose by 271,000 jobs in October. This is a 90% increase from September’s number, which added 137,000 jobs.
According to the U.S. Department of Labor, the majority of job gains occurred in the professional and business services, retail, and construction sectors. Let’s have a look at how the major consumer discretionary ETF in the United States (XRT) has performed against falling unemployment rates.
As can be seen from the above chart, the consumer discretionary sector of retail has been showing an almost perfectly negative correlation with the unemployment rate in the United States. It has a correlation of -0.90 with the unemployment rate.
What’s the relation?
The unemployment rate is the measure of the number of people who are without a job as a percentage of the total labor force of the United States. One may not be wrong to say that it is a lagging indicator as to the strength of the economy, but when we relate it with the consumer discretionary sector of retail, it more or less acts as a leading indicator.
Improving employment conditions in the economy leads to two situations that directly affect the consumer discretionary sector.
A falling unemployment rate means that more people are getting jobs, which leads to a rise in disposable income in the hands of consumers. It also instills confidence in job security in the minds of already employed people. This helps to increase consumers’ spending.
In the next article, we’ll have a look at October’s wage growth and its implications on the consumer discretionary sector.