How Non-Farm Payroll Reports Work
Out of all the regular economic announcements released by the governments of major economies, by far the most important one is the Nonfarm Payroll report (sometimes called the NFP) which is released by the Bureau of Labor Statistics in the United States. The market can react quite violently to these reports, and at one point it was a well-known strategy to trade these announcements. Today, however, you quite often see most of the large players out there remaining outside of the market during these announcements.
What is the Nonfarm Payroll Report?
The Nonfarm Payroll announcement is simply the US jobs report, with farm related jobs, unincorporated self-employment, nonprofit organizations, and military and intelligence agencies excluded. In other words, it’s a report of the “typical worker” in the United States. The report is released during the first Friday of every month at 8:30 AM Eastern Standard Time. It will outline the amount of jobs either added to or subtracted from the economy during the previous month. For example, if it is the first Friday of June 2018, the release coming out would be for May 2018. This gives us an idea as to how healthy the United States economy is, which of course has a major influence on the US dollar.
Other central banks have employment figures as well obviously, but Forex traders don’t pay as much attention to them as the US dollar is the world’s reserve currency. All major Forex pairs are somehow connected to the US dollar, so it makes sense that it would have a massive influence on the way money flows back and forth across international borders.
How it’s Broken Down
Beyond simply reporting how many jobs are added or subtracted, the Nonfarm Payroll report also breaks down jobs by sector. Some of the sectors include healthcare, wholesale trade, retail, transportation and warehousing, mining, construction, and many more. This give you an idea not only of how the American economy is growing, but also what sectors specific are growing. This information is also very useful for stock traders. For example, if you see that healthcare employment is rising, that means that typically there should be more demand for that sector. A stock trader would look to buy HMOs or some other type of company like that.
Typically, about a week before the announcement comes out you will start to see predictions out as to where the announcement should land. For example, certain analysts may expect an addition of 350,000 jobs for the previous month, while others may have higher or lower expectations. When the announcement comes out as expected, it typically doesn’t have much impact on the Forex markets. However, if you see a huge miss in either direction, the US dollar will typically react quite strongly. This is exacerbated by the lack of liquidity around the time of the announcement. If you have a variable spread broker, you will see spreads widen out during the announcement because most of the large funds will step away.
The unemployment rate is part of the announcement as well, as it comes out simultaneously. The higher the unemployment rate, the weaker the economy is. This is because people won’t hire workers if the economy is slowing down. It is for this reason that a rising unemployment rate is typically bad for the US dollar. Alternately, if the unemployment rate continues to dwindle, this means that more people are working, which means that the Federal Reserve is more likely to raise interest rates. At that point, the US dollar will appreciate in value.
Like almost any other government figure, there are plenty of critics out there. For example, the official unemployment rate that the Bureau of Labor Statistics releases is known as “U3.” It is calculated by dividing the total labor force by the number of unemployed and multiplying it by 100. One problem is that the US government considers those working part time as employed, regardless of whether they wish to find full-time employment. They also consider those who perform at least 15 hours of unpaid family work as employed and those performing temporary work as being employed. In order to be part of the labor force, you need to have looked for work in the last four weeks. Unfortunately, it doesn’t count those who have “given up” as among the unemployed, because it doesn’t keep them in the labor force. Most people will look at the “U6” as the more predictive and correct indicator. The U6 indicator is an employment report that includes part time workers to give a stronger economic perspective.
Most traders look at the Nonfarm Payroll announcement as the best figures that we have to work with, so the market will pay attention to them. However, in the end it’s not very correct, as if you look at the numbers a year later, they are almost always corrected and revised, normally lower.
The Bigger Picture
Forex markets have changed quite drastically over the last decade or so, and although the Nonfarm Payroll report is still very important, it doesn’t hold the same importance it once did, mainly because Forex markets are starting to move on different principles. For example, we are starting to see the US dollar act as a safety currency more than anything else, with traders accepting more that the employment situation in various countries (including the US) will be somewhat fluid. Occasionally you get the anomaly of a bad or good month, so keep in mind that most traders are now starting to look at the Nonfarm Payroll report as a trend to follow, not necessarily the “be-all end-all” of indications as to which currency to go along with.