Analysts have long looked to aggregate earnings news to predict future economic growth, inflation, and even monetary policy. But given the increasing significance of forecasting labor market growth, can those GAAP earnings also predict the future path of the labor market?
Research forthcoming in The Accounting Review explored this question. Accounting professor Rebecca Hann at the University of Maryland’s Robert H. Smith School of Business, with co-authors Maria Ogneva (University of Southern California) and Congcong Li (Duquesne University), tied aggregate earnings and their components to aggregate job creation and destruction – essentially forecasting future hiring and future layoffs.
While the future direction of the labor market may be difficult to forecast in current times, Hann says her research shows that information in a firm’s financial statements can act as a key predictor. “In prior research, we often focus on the information content of earnings at the firm level. But earnings have a firm-specific, an industry, and a market component. When you aggregate firm-level earnings together, the firm-specific news is mostly diversified away,” says Hann. “And hence, shocks in earnings at the aggregate level can tell us where the economy is going.”
The study, “Another Look at the Macroeconomic Information Content of Aggregate Earnings: Evidence from the Labor Market,” is forthcoming The Accounting Review and available at SSRN: http://dx.doi.org/10.2139/ssrn.2993654.
