Non-Farm Payroll

What is the Non-Farm Payroll report?

The Non-Farm Payroll report (NFP) is the U.S. employment report released every month by the Bureau of Labor Statistics (BLS), it tracks employment trends for US workers employed in the construction, manufacturing and goods sectors.

The Non-Farm Payroll tracks about 98% of the overall U.S. workforce and excludes workers who are employed on farms as well as those working in private households, government agencies, and non-profit employees. The BLS labor market report does not only show how many jobs were created in the past month, but it also covers statistics on earnings and hours worked.

As it is technically impossible to survey all of the U.S. economy each month, the BLS work with a sample of 142,000 firms and government agencies which approximately covers 689,000 individual worksites. Effectively, the sample amounts to one-third of all U.S. non-farm payroll employees.

Non-Farm Payroll Dates 2019

Upcoming US Non-Farm Payroll dates are listed here, and as always stands to rock Forex traders, and stock market traders alike.

Why is the non-farm payroll report so important?

Traders and analysts alike usually look forward to the release of the non-farm payroll because they provide a summary of the state of the US labor market. This is extremely valuable to Forex and stock market traders because the US employment situation is considered a significant factor by the Federal Reserve when setting interest rates. Also, the NFP yearly change has a good correlation to annual GDP growth. The benefit of the NFP report is that it is released each month, while the GDP report is published quarterly with at least one months lag, thus the NFP report acts as a proxy for GDP.

The fact that the US is the world’s largest free economy means that the state of its labor market serves as an indicator of the overall health of most developed economies. The US is also the world’s largest consumer market and the state of its economy affects many other countries with trade links to the country.

The Federal Reserve pays close attention to the number of new jobs added to the US economy as well as the number of jobs lost as the net contribution could either lower or increase the unemployment rate. The unemployment rate is closely linked to future inflation levels.

The creation of employment within an economy can lead to higher inflation levels as consumers have more spending power, while job losses could lead to deflation as consumers reduce their spending.

Therefore, in most cases, the Federal Open Market Committee (FOMC) considers rate hikes whenever jobs grow at a fast rate and the unemployment is low, while they consider rate cuts whenever there are widespread job reductions. The NFP report also offers insight to wage changes, which is another form of inflation.

In its simplest form, the Federal Reserve, and FOMC must strike a balance between the unemployment rate and inflation. The ambition is to have a low unemployment rate and an annual inflation rate of 2 percent.

Non-farm Payroll Impact on Forex

The FOMC sets its interest rate at a level that will allow the economy to grow without inflation spiraling away. If the economy is growing well, the interest rate tends to be higher, and high-interest rates tend to attract savers and investors from countries with low-interest rates.

This was the case for most of 2018 when the FOMC hiked rates four times for a total of 100bps, which drove the US dollar to become one of the best performing currencies of the year.

For traders and investors who were trading currency pairs that included the US dollar in 2018, one of the most profitable ideas was to make trades in favor of the US dollar based on positive NFP reports as well as the FOMC monetary policy decisions.

Non-farm Payroll Impact on Stock Markets

A good amount of job creation that does not create a surge in inflation tends to be welcomed by shares and indices traders. More people employed means that more people are getting paid, and with the money they will consume more which will help companies to generate more profit and value for their owners. However, at one point the economy might be about to overheat if the unemployment rate is too low, and that could lead to damaging inflation, as workers are only willing to change jobs if they get salary increases. By this point, the Federal Reserve would typically have increased interest rates a few times to lower the pace of the economic growth, and with this also the pace which stock market indices would grow. If the Federal Reserve was to increase interest rates too much as the unemployment rate or the NFP were too strong, then they might force economic growth to a halt, and possibly to scale back, which could have grave consequences for share prices.

Non-farm payroll components

The headline NFP figure is the most watched statistic and shows how many jobs were created. The figure tends to be positive in times of economic growth, and negative in times of recession. The monthly figure of jobs creations itself tends to be rather volatile, but over the last ten years, the monthly average has been 137,000 new jobs, according to data from the U.S. Bureau of Labor Statistics.

Other key components in the report are:

The unemployment rate: this measure shows how many people out of the workforce are working. There are different versions, which provide different interpretations to the state of the economy but the most cited one and the official one is the U3 unemployment rate.

The report will also breakdown which sectors of the economy are gaining or losing jobs, and this can be interesting for investors trading shares that operate in specific sectors. As an example, investing in a manufacturing company might not be the best if the sector itself just started to shed jobs.

Average hourly earnings: this is a key item of the report and helps the FED to assess the tightness or slack of the labor market. Normally it is enough to have a low unemployment rate to see inflation pick up, but in the last decade, the jobs created have been in low-wage sectors, with low purchasing power. Thus, even if most people are employed, they are not earning enough to cause inflation to spiral away and with this in mind, the Federal Reserve took its time before increasing interest rates.

How to Trade the Non-Farm Payroll Report

There are a few ways of trading the Non-Farm Payroll (NFP) report. Investors with longer-term investment horizons will primarily focus on the big picture, and will adjust their portfolio depending on their long-term view on NFP, and how the Federal Reserve will react to the reports. Other traders will try to play with the short-term volatility generated around the release of the news event.

How is the median economists’ projections derived?

News agencies such as Bloomberg News, and Reuters will collect 80 to 100 estimates from banks and research houses. From the sample, a median estimate is calculated, and it shows the mid-point of the estimates, this figure acts like the market benchmark.

If the actual NFP outcome is better than the estimate, then this means that the economists underestimated the strength of the economy. If the figure is below the estimate, then this means the opposite. If the NFP figure is much better than expected then stock markets tend to gain, and likewise the U.S. dollar. However, if the reading is much lower than projected then stocks and the dollar might fall.

Yet, there is more to trading the NFPs than the basic strategy outlined above. Economist and traders will take into account where in the business cycle the economy is, and what the Federal Reserve will do in regards to the NFP report outcome. They will also look at the granular details such as how wages have been developing and the change in the unemployment rate before jumping to conclusions, and placing their trades.