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Non-Farm Payrolls (NFP) report - one of the most important indicators
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Non-Farm Payrolls (NFP) report - one of the most important indicators

created Forex ClubJune 29 2021

In the previous article describing the macroeconomic indicators, the following was mentioned ADP report,  which describes the condition of the American labor market. The ADP report is prepared by a private company. In turn The Non-farm Payrolls report (in short: NFP) is compiled from data collected by the US Department of Labor (United States Department of Labor). Data is aggregated by a government agency - Bureau of Labor Statistics (BLS). It collects data on how employment changes in the United States. It is worth remembering that the data presented in the report concern non-agricultural employment. The full name of the report is Non Farm Payrolls. By analyzing the value of the NFP index and the trend, analysts gain insight into the condition of the American economy.  

What is Non-Farm Payrolls (NFP)?

Apart from data on employment in the non-agricultural sector, the report contains a number of financial and economic data. The report prepared by BLS is prepared monthly and is often referred to as the labor market report. In addition to agricultural workers, the report excludes some government workers, property owners and non-profit workers. Below is a more detailed description of the types of workers excluded from the statistics:

  • government employees - the government is one of the key employers included in the NFP report. However, some workers are excluded from the statistics. This applies to, among others, military employees of the CIA (Central Intelligence Agency), NSA (National Security Agency), NIMA (National Imagery and Mapping Agency) and DIA (Defense Intelligence Agency).
  • household - excluded from statistics are employed in households.  
  • owners - self-employed in one-person companies are also excluded (they do not have the form of LLC or partnership)
  • non-profit employs - workers employed in the non-profit sector (e.g. foundations) are excluded.

The report, called The Employment Situation Summary, is a very detailed study. It consists of three main parts:

  • Household Survey Date
  • Household Survey Supplemental Data
  • Establishment Survey Data

Household Survey Date informs on the unemployment rate as it is on the American market. Unemployment also reports unemployment in individual groups of workers (White, Latin American, Black and Asian). The report also publishes teen, adult and gender unemployment. This part of the report divides the unemployed according to the length of looking for a job. The unemployed are divided into jobseekers for 5 weeks, 27 weeks and more. 

Another information contained in this part of the report is the participation rate, which it provides what percentage of the labor force has a job or is actively looking for it.

The next data published in the report is number of employees working part-time for economic reasons. In May 2021, there were 5,3 million such people (873 thousand more than in February 2020). People included in this group would like to work full time, but cannot find such a job.

Household Survey Supplemental Data he informs about the number of employees performing remote work. In May 2021, it was 16,6% of employees. This means a decrease of 1,7 percentage points. People included in this group of employees have worked from home or remotely for the last 4 weeks, receiving remuneration for it.

It also lists people who lost their jobs or work less because of business closures or job cuts due to the pandemic. People included in this group do not work or work less than before the pandemic.

Establishment Survey Data is a very detailed list of changes in employment in individual sectors of the economy. For this reason, this part of the report is also useful for those who monitor the condition of individual sectors of the economy. Among the separated sectors, the following can be mentioned:

  • hotels and leisure;
  • public and private education;
  • health protection and social assistance;
  • information;
  • production;
  • transportation and storage;
  • Wholesale;
  • construction;
  • professional and business services;
  • retail sales.
NFP report

Source: bls.gov

Another piece of information contained in the report is average hourly wage. It stood at $ 2021 in May 30,33, an increase of 15 cents month-on-month. The next data concern the average working week in individual industries. In May this year it amounted to 34,9 hours, while in the manufacturing industry the working week was 40,5 hours.

When is the NFP published?

The Non-Farm Payrolls (NFP) report reports a change in the number of non-farm jobs in the United States over the past month. United States Department of Labor it is published on the first Friday of every month. For example, on Friday, June 4, 2021, the NFP report for May 2021 was published. The publication of the report was two days after the publication of the data by ADP.

How to interpret the NFP index?

Employment growth

In a situation where the NFP indicator reports an increase in employment, a conclusion can be drawn about economic development. You could say that there is a "flywheel" effect. The increase in demand for labor causes a decline in unemployment and competition from employers for employees. As a result, there is pressure to increase wages. Falling unemployment and higher wages are boosting household incomes. This, in turn, translates into better retail sales and an increase in consumption in the economy. Such a situation causes that there is a greater demand in certain sectors of the economy. In such a situation, there is a greater demand for employees. 

Employment decline

If there is an increase in unemployment, it is a signal of "cooling down" of the economy. There is a reduction in employment and a decrease in pressure on a salary increase. This translates into a deterioration in the financial condition of households. In such a situation, consumer spending decreases, which reduces the demand for individual products. This reduces the revenues of individual companies, which forces companies to reduce capital expenditure or reduce employment. 

NFP report - an important trend and expectations

Of course, the increase in employment itself does not always have to be interpreted as a positive signal. It may take place when the employment growth was lower than market expectations. As a result, the recovery in the economy may be weaker than expected by professionals and investors. The opposite situation may take place when the market reacts positively to the news, despite the negative reading. This may be due to the fact that the weakening in the economy is smaller than expected by the market. 

Sometimes the disastrous data from the labor market may be interpreted “positively” by the market as a result of investors discounting the scenario of the government or central bank launching aid packages. 

What is the report important for investors?

The NFP report is also a monthly "test" of the condition of American enterprises. Increasing employment is a measure of the improvement in the condition of American companies. The increase in employment results from the company's expectations as to the improvement of its economic situation (more clients, orders). In the case of job cuts, companies send a signal that their condition is deteriorating. 

Another aspect has to do with the analysis of market sentiment. If the market does not react to the positive reading of the NFP index (better than expected), it proves the market's weakness. In a situation where the market "ignores" negative signals from the wage market, the market is dominated by a bullish narrative. This proves the strength of the market.

NFP and GDP

The NFP report is an indicator "ahead" of the data about Gross Domestic Product. Due to the fact that the NFP is published monthly, it provides interesting data to be used in GDP projections. For this reason, poor NFP readings may indicate an increased likelihood of an economic slowdown.

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