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Nonfarm Payroll Report: What is it?

NFP Report

Nonfarm Payroll Report: What is it?

Nonfarm payroll is a phrase used in the United States of America that encompasses all jobs apart from agricultural work, the self-employed, charities and the military. The US Bureau of Labor Statistics publishes carefully studied monthly data regarding nonfarm payrolls as a section of the Employment Situation Report, also called the Jobs Report. The difference in total nonfarm payrolls is compared to the preceding month as a way of evaluating the overall health of the economy; for this reason, the nonfarm payroll report is an economic indicator.

When is the Nonfarm Payroll Report Published?

The nonfarm payroll report is usually published on the first Friday of every month at 8:30 am EST. The findings and results are used by bankers, policymakers, state officials and economists to gauge the performance of the economy and to forecast the future trends and path of the economy based on the data.

How important is the Nonfarm Payroll report?

The most significant piece of data that comes from the nonfarm payroll report is the difference in total jobs that were either added or taken away from the previous month. The NFP report also hints at the condition of the US labor force which has an immediate effect on currency values, the stock markets, and gold prices. The general health of the US economy, and subsequently the global economy for that matter, can be gauged by the nonfarm payroll report. The sum nonfarm payroll makes up and takes into consideration around 80 percent of the workforce that generates the United States’ total GDP (Gross Domestic Product).

The nonfarm payroll report also indicates the rate of unemployment within the US labor force. There are three areas that the report focuses on; these include:

  • A general unemployment rate.
  • Youth unemployment rate.
  • Long-term unemployment rate.

The participation rate of the US workforce is additionally an important statistic used by economists to come up with an accurate prediction of the nation’s unemployment rate.

What exactly does the Nonfarm Payroll report show?

Data from the nonfarm payroll report give an insight into which sectors create the greatest number of jobs, paying close attention to the largest increases and decreases. The NFP report covers a wide range of industries such as:

  • Construction
  • Business services
  • Retail and wholesale trade
  • Transportation
  • Health care
  • Government
  • Hospitality
  • Manufacturing
  • Leisure

Data from the NFP report is commonly used by investors and analysts as a way of forecasting which sectors and stocks could have high earnings reports.

The NFP report also includes data on average hourly earnings, changes to monthly and hourly wages. Each monthly NFP report can sometimes include amendments to previous reports.

What was the Nonfarm Payroll report for June?

The NFP report for June squashed all forecasts. The Labor Department reported over 220,000 additional jobs were created in contrast to the forecast of 165,000.

The portfolio manager at Allianz Global Investors, Burns McKinney suggested that an interest rate cut by the Federal Reserve could come at the end of the year:

“I think it’s very clear the way equities are trading, and it, to some degree, reaffirms the movement that we’ve had in recent weeks: … very binary, very risk-on, risk-off based on interest rate policy and trade policy. And when you consider the fact [that] we had a very strong jobs report, unemployment’s near the lowest it’s been in 15 years, stocks are at all-time highs or near all-time highs, it suggests that maybe we shouldn’t expect [a rate cut] in July. That said, we believe that one to two rate cuts at some point this year, perhaps in September and December, are still likely based on the Fed’s desire to reverse any inversion in the yield curve and the fact that you have imbalances with respect to low rates elsewhere. And what really matters for equity investors is not necessarily what the Fed does, but what they do relative to what is desired or expected by the markets. … You know, if a kid goes to the fair and they think they’re going to get three scoops of ice cream and they only get two scoops of ice cream, there’s probably going to be a little bit of a tantrum. And, based on that, we suggest that stocks aren’t terribly cheap. It could be a little bit more volatile at some point later this year. And so one of the things that we’re suggesting to our clients is maybe take a little bit of a barbell approach whereby [you] get a little bit of your offense not through necessarily growthier areas, but through disruptors, things like mobile payments or cloud computing, and try to find cheaper ways to play defense – maybe not in the bond proxies, but maybe in the defense sector or perhaps health care.”

How do I analyze the NFP report data?

As with all economic indicators, analyzing the nonfarm payroll report can be broken down into three methods:

  1. If the NFP figure is lower than forecasted it is often damaging for the US economy because low employment rates have a direct impact on the global economy and the US dollar. If the nonfarm payrolls report indicates that less than 100,000 jobs were created it can suggest that the economy is suffering a slowdown, therefore investors and traders could prefer a higher-yielding basket of currencies against the US dollar.
  2. If the NFP data is as forecast by economists, it can sometimes cause a varied response within the financial markets. Foreign Exchange traders that notice an anticipated change in the NFP data can look at other aspects of the report such as the rate of unemployment and manufacturing payrolls.
  3. If the NFP report is greater than expected it often means the US economy is growing. This is because when consumers are employed they are likely to have more money to spend on goods and services.

Jurrien Timmer, Fidelity Investments Director of Global Macro suggests that the NFP report is merely one piece of the puzzle when it comes to deciphering the overall health of the US economy; aside from the NFP report, other data indicates a slowdown is on its way:

“It was a good number. It was a Goldilocks number, but, certainly, there’s plenty of other information out there that suggests that the U.S. has joined the rest of the world in kind of a synchronized global economic slowdown and that a couple of insurance cuts here over the summer or into the fall makes sense. You know, probably not a 50[-basis-point cut] in July. … That really didn’t make a lot of sense in my mind anyway. But I think the Fed is still poised to cut and whether they actually cut or not, we don’t know. But my guess is that they will, and in a slowing growth environment, the payroll number notwithstanding, I think that kind of insurance cut with inflation running so much below its target makes sense here. And they can always take those cuts back next year if the economy re-accelerates.”

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