All about the Nonfarm Payroll (NFP)
Always check the Economic Calendar
Later today, there will be released two separate surveys in one report. The first is a survey of 60,000 households (called the household survey). Workers are counted once, no matter how many jobs they have, or whether they are only working part-time. To be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.
The second survey is the Establishment Survey –a survey of over 557,000 worksites. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job. Always keep in mind that this is just a single indicator. One that appeals to the emotions of many traders, but is hardly representative of the overall economy.
Market reactions to this indicator are usually dramatic. The employment data given is comprehensive on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers guide, not determine, the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.
The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.
By tracking jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it’s a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline – boosting up bond and stock prices in the process.
The employment situation is the primary monthly indicator of aggregate economic activity; it encompasses all major sectors of the economy. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. The Fed has emphasized that it is overall labor market conditions that matter – not just a specific number.
The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.
The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates.
The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.
Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.
When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.
Gains in average hourly earnings represent wage pressures. These figures aren’t adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.
90% of the time, I close out 90% of my positions the week of the NFP release.