The US Non Farm Payroll (NFP) data is probably the most widely anticipated economic indicator in any market around the world, and one which never fails to move the pounds to dollars exchange rates. As with all indicators it is important to realise that the data can be viewed in two very different ways. Firstly it is a snapshot of the economy, which may have seasonal or other variations which can distort the data, and is viewed in isolation, or secondly, it is considered part of a longer term trend and is simply one piece of information in a series which make up a complete picture.

Non Farm Payroll is the big one – it is the data that all traders and investors wait for as no single indicator can jolt the stock, bond and currency markets as much as this one. NFP is another economic indicator, but this time based on employment figures. The figures are announced monthly, normally at 8.30 am EST on the first Friday of every month from the Bureau of Labor Statistics, Department of Labor. One question new traders often ask is why is it so important, and why do the markets become so volatile. There are three principle reasons. Firstly, it is one of the few economic indicators which provides timely information on the employment situation as the figures are released just a week after the end of the month being reviewed. This means in effect that the data is never more than 5 weeks old, which in terms of indicators is extremely unusual. Secondly the report is rich in details about the job market and household earnings, information than can help forecast future economic activity. Thirdly we are being provided with direct evidence of the well being and confidence of the American workforce. Wages and salaries make up the main source of household income. The more they earn the more they spend and the more the economy grows.
Finally, there is a another reason why the markets react so strongly to the data, and it is simply this – as the data is so tightly protected and therefore so difficult to forecast, there are often surprise in the news. The economists and experts have a very difficult time forecasting the news, and are often wildly optimistic or pessimistic.

The  highlight of the NFP is the unemployment report, which is the percentage of the civilian workforce that is unemployed. By definition it is anyone who is 16 years or older who is classified as employed or unemployed. The data is constructed from two different sources. The first is from a ‘household’ survey, where date is collected from telephone and  postal feedback. The second is from the ‘establishment’ survey, in which companies are polled directly about recent changes in staff. Together the two surveys provide a balanced view of the labour market and more broadly the economic health of the country. The only groups excluded from the establishment survey are farm workers, the self employed and domestic help, hence the indicator’s name – Non Farm Payroll. The report itself contains a vast amount of data, but the figures which attract the attention are whether jobs have increased or decreased, and by how many. The markets react to this data immediately, but within the figures are many nuggets of information covering average hourly earnings, overtime, hours worked and sector by sector comparison. So let’s look at one or two of these as follows: ( there are plenty of others so if you would like further details please just drop me a line)

  • Hours Worked – differences in hours worked can be another advance indicator of future economic activity. At a very simple level, assume that the average number of hours worked increases for 3-4 months in a row – then clearly something is happening and could be a strong sign that the economy is growing, and that more jobs will be created in the medium term.
  • Overtime Hours – another excellent indicator of increasing output and therefore a growing economy. During difficult economic times, companies generally make their labour force work longer hours, rather than employ more staff. Since overtime is also costly, eventually the overtime hours are replaced by full time labour. So if overtime hours are steadily increasing over 3-4 months, then this suggest that the economy is growing and that new jobs will also be created. A steady level over 4.5 hours is a sure sign of new jobs.
  • Duration of Unemployment – this is a good barometer of economic activity as it shows how long the unemployed have been without jobs. In simple terms a falling trend suggests that the economy is picking up, and alternatively a rising trend suggests the opposite.

Overall, employment data can strongly influence the US dollars value. A strong jobs report could drive interest rates higher, making the dollar more attractive to overseas investors particularly if they look to invest in US Treasury Securities. Alternatively if the report is weak then it can put pressure on US stocks and increases the chances of the FED reducing rates in the future making the dollar less appealing.