The U.S. Non-Farm Payroll (NFP) measures the change in the number of people employed during the previous month, excluding the farming industry. Job creation is the most important indicator of consumer spending, which accounts for the majority of economic activity. It is a monthly statistic tracked by the Bureau of Labor Statistic (BLS) for the U.S. market.
It is also known as the “Employment Situation”. It is always released at approximately 8:30 Eastern Time. The Non-Farm Payroll dates are the same; the employment report is released on the first Friday of every month, providing data covering the previous month.
The report contains information on unemployment, U.S. jobs data about growth and payroll data, among other statistics. Being a U.S. jobs report, it has many valuable insights into the labor force that have a direct impact on the economy as well as the stock market, the value of the U.S. Dollar, the value of treasury bonds, and the price of Gold. The report offers important information on sectors with detailed sector segregation. Non-Farm Payroll statistics also show which sectors of the economy are expanding and contracting. Expanding sectors will contribute with a higher number of new payrolls and contracting sectors may have low or negative contribution showing a reduction in job availability.
The monthly “Employment Situation” report is created from two comprehensive surveys: The Household Survey and The Establishment Survey. The Household Survey provides the unemployment rate report as well as details on employment demographics.
The components of The Household Survey are based on the unemployment rate and divided into different sections: gender, race, education, age, reasons for unemployment and participation rate.
The Establishment Survey portion of the “Employment Situation” report provides details on Non-Farm Payroll additions. Its components are:
- The number of total Non-Farm Payrolls added by entities for the previous month
- Non-Farm Payroll additions by industry category: durable goods, non-durable goods, services, and government
- Hours worked
- Average hourly earnings
The Household Survey data is analyzed by the economists when considering the trend on the unemployment rate, participation rate, and other trends which can be associated with demographics. Wages and wage growth are also very important to economists.
Historically, the best time for wage growth is usually during summer, with an average of 129,000 additional jobs. According to BLS, job growth has averaged 158,000 per month.
Like in the case of other indicators, the difference between the actual number and the forecast determines the impact on the market. When the NFP is going up, it indicates a growth in the economy, but of course, it could go the other way around. An inflation increase can be seen if the NFP goes up at a fast rate.
For example, when it comes to NFP trading on the currency pair market, the actual NFP compared to the forecast is taken very seriously. If the actual is lower than forecasted, a weakening of the currency is expected. The opposite is expected when the U.S. Non-Farm Payroll is exceeding the expectations of the economists.
The beginning of 2020 was off to a good start with 225,000 new jobs. New jobs occurred in construction, health care, transportation and warehousing. At the same time, the employment report suggest the U.S. economy continues to go forward; the unemployment rate edged up to 3.6% from a 50-year low of 3.5%, according to marketwatch.com.
In the case of the unemployment rate, a lower result than the forecast is good for currency. Although is considered to be a lagging indicator, the number of unemployed people is an important sign of overall economic health because consumer spending is correlated with labor-market conditions.
Economic research director at Hiring Lab, Nick Bunker, said that “this expansion has continuously disappointed on wage and pay gains, but its ability to pull more and more workers into the labor force is astounding.”
According to the BLS, Non-Farm employee classification accounts for approximately 80% of U.S. business sectors contributing to gross domestic product (GDP).
Like any other economic data, there are different ways to analyze the U.S. Non-Farm Payroll:
1. A higher payroll figure is good for the U.S. economy. This is because more job additions contribute to economic growth. Consumers who have both money and a job tend to spend more, leading to growth. As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above than this will help fuel U.S. Dollar gains, according to Investopedia.com
2. If the unemployment rate drops, currency traders will side with a stronger Dollar, a positive move for the U.S. economy. But if the unemployment rate increase, investors will drop the U.S. Dollar for other currencies.
When it comes to trading on this movement, it is obvious that the U.S. Dollar is getting the biggest influence by this, and, by extension, commodities like Gold and Oil, also Indices.
The common response when trading currency pairs is that a strong NFP means that the USD is strong, while its pair loses value. Also, when trading on commodities that are priced in Dollars, more can be purchased for the same amount of money (the price of commodities goes down).
According to Nasdaq.com, when trading Gold, the NFP’s impact is strong not only because a strong NFP can support the Gold price if there is a demand on the market, but also because there is a movement expected against the Dollar, analysts say.
For Oil and Natural Gas, the NFP is not necessarily a good indicator of price direction, but if the report is a strong one it is a sign of economic and consumer health. According to analysts, an increase in price is expected (bullish market), according to Nasdaq.com.
As said before, the NFP can have an impact on indices, as well. It is important because the indices are an expression of gains and losses of the market, and that can easily be seen in the charts. There are of course two sides for this: if the NFP is strong, trends and precedents can be confirmed, and future expectations can be made. On the other side, a weak NFP on a time when the wages decline, could mean that the market is going down (bearish move).
The NFP is a vital indicator for the U.S. and considered to be the most important economic regulator. It indicates the strength of the U.S. economy. The NFP influences most assets of the market.
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Sources: marketwatch.com, investopedia.com, nasdaq.com
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Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
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