NonFarm Payroll | NFP

What is the Non-Farm Payroll report?

The Non-Farm Payroll report (NFP) is the US 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 services sectors.

The Non-Farm Payroll tracks about 98% of the overall US 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 labour market report shows 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 US economy each month, the BLS works 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 US non-farm payroll employees.

Non-Farm Payroll Dates 2023

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 place a high importance on the non-farm payroll because it is a summary of the state of the US labour 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 month’s lag, thus the NFP report acts as a proxy for GDP.

The fact that the US is the world’s largest economy means that the state of its labour 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 into 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.

NFP Impact on Forex and Stocks

As a leading indicator for the US GDP report, traders will support the US dollar with a positive non-farm payroll report, and they will sell the dollar if the jobs market disappoints.

The stock market will take a more intricate view of the report, but a strong number of jobs added will be bullish. More people employed means that more people are getting paid. That will ultimately find its way into the economy and generate more profit for businesses.

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 created can be volatile and economists are not always accurate in predicting the number. That is why traders love to get involved around the release.

Other key components in the report are:

The unemployment rate: This shows the percentage of workers that are currently not employed. 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 will impact shares that operate in specific sectors. As an example, investing in a manufacturing company might not be the best if the sector is seeing large-scale job cuts.

Average hourly earnings: This is a key item of the report and helps the FED to assess the tightness or slack of the labour 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 a large number of 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. They will adjust their portfolio depending on their long-term view of the NFP, its effect on the economy, and how the Federal Reserve will react. Short-term traders will look for volatility generated around the release of the news event.

How are 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.