A Breakdown of the Non-farm Payroll Report
What is the non-farm payroll report?
The non-farm payroll report measures the number of people in employment with the exception of agricultural work, the self-employed, non-profitable charity work and the military. As part of the Employment Situation Report, the US Bureau of Labor Statistics publishes information and statistics on non-farm payrolls on the first Friday of every month. The contrast between the previous result, the forecasted result and the actual result is used to help indicate and gauge the overall health and direction of the economy.
How important are non-farm payroll reports for investors and economic analysts?
The most important data that the non-farm payroll report has to offer is either the increase or decrease in the number of jobs which are then compared to the previous month’s job figures. The NFP report additionally provides indications of the status of the workforce, the stock markets, the value of both the currency and gold. The non-farm payroll report is vital when it comes to gauging the economy’s general health and direction because it shows how businesses in the US are performing and subsequently gives an indication as to what the Federal Reserve could do with national interest rates.
Total nonfarm payroll employment increased by 196,000 in March, and the unemployment rate was unchanged at 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services.
This news release presents statistics from two monthly surveys. The household survey measures labor force status, including unemployment, by demographic characteristics. The establishment survey measures nonfarm employment, hours, and earnings by industry. For more information about the concepts and statistical methodology used in these two surveys, see the Technical Note.
Taken from the United States Department of Labor.
Information from the non-farm payroll report also helps analysts to decipher which of the following work sectors are responsible for the highest increase in jobs. The NFP report focuses on sectors ranging from firms, health care and manufacturing to retail, construction and transportation.
The NFP report also gives analysts and traders an insight into the rate of unemployment and changes to the minimum wage. “The best month for wage growth is usually May, with an average of 129,000 additional jobs. August is the worst month, with an average of 69,000 additional jobs. The year 1994 was the best on record with 3.85 million added jobs. That year saw gains reported in every monthly nonfarm payroll report. In 2009, the job force lost 5.05 million jobs, marking the worst statistical year for the nonfarm payroll. Meanwhile, in 2017, payroll employment growth totaled 2.1 million, compared with a gain of 2.2 million in 2016.”
Taken from Investopedia.com.
The non-farm payroll report is highly anticipated by investors, economists and traders. When employment rates are high consumers generally have more to spend on goods and services which ultimately boosts the health of the economy.
Does the non-farm payroll report have any disadvantages?
Seeing as the figures are based on estimates, the initial NFP figure is often updated two times before a final figure is published. Therefore, the initial figures that surface lack accuracy which is risky and volatile for traders and investors.
So, what does this mean? Simply put, one of the most effective ways of evaluating the NFP report is by allowing the initial figure to be updated. Another productive way of reading the non-farm payroll report is by following the overall movement of the revised figures. This way could provide an indication as to how the trends will progress.
How do the non-farm payroll reports affect the Federal Open Market Committee (FOMC)?
What is the Federal Open Market Committee? The FOMC is “the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members–the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.”
Taken from the Federal Reserve website.
The committee aims at controlling the rate of employment and inflation. For this reason, it needs to keep an eye on the non-farm payroll figures so as to gain an insight as to how the economy is performing when deciding on key monetary policies such as the percentage rate of interest.
Understanding the non-farm payroll figures
- When the NFP figure is lower than forecasted, meaning that fewer jobs are created and unemployment is on the rise it can be damaging for the growth of the US economy and the US currency, which ultimately encourages forex investors to trade higher valued currencies against the USD.
- When the NFP figure is the same as the forecast then investors often look for other clues by analyzing the other components of the report such as the rate of unemployment and manufacturing. For instance, let’s say the rate of unemployment rises but the number of manufacturing occupations plummets, investors could be encouraged to favor other currencies outside the US, whereas if the rate of unemployment drops and manufacturing jobs increase forex traders could favor the US dollar which helps to boost the economy.
- A non-farm payroll report that comes in higher than forecasted by analysts strengthens the US economy. High employment and income rates tend to increase consumer spending which is a key driver of economic growth.
The US jobs report leading indicators keep showing mixed signals. The two big indicators released today pointed to different trends. The US ADP private employment report estimated a healthy increase of 275K jobs in April, which shows an improvement relative to the 151K in March, upgraded from 129K originally reported. Meanwhile, the Employment Index of the ISM Manufacturing PMI survey showed some moderate retracement in April, falling to 52.4% from the very upbeat 57.5% seen in March.
The ADP Employment Change number is a highly correlated figure to the Non-Farm Payrolls, which might indicate that Friday’s NFP number might rise above the averages of around 200k seen in the current positive employment trend. According to our NFP guide, “investors often consider the ADP report as the harbinger of the BLS release on payroll jobs, the NFP, because of the existent correlation between the two.”
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The non-farm payroll report is an important indicator and gauge of the overall health of the US economy. The rate of employment is strongly correlated to the rate of consumer spending and sentiment, for this reason a positive NFP report can trigger growth for the economy.
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