With the biggest economic report in the financial universe coming out tomorrow, investors and traders want to pay close attention to the report and its effect on the year over year unemployment rate.
For you new traders out there, this is Nonfarm Payroll week. This monthly employment report can give the market an idea of the relative strength of the US Labor Market. The NFP report, as it is commonly referred too, is generally released on the first Friday of each month. I thought we would cover the ins and outs of the payroll report.
What is nonfarm payroll employment? Nonfarm payroll employment is an influential statistic released monthly by the United States Department of Labor as part of a comprehensive report on the state of the labor market. It is a report that covers the employment numbers for goods-producing, construction and manufacturing companies for the previous month. Typically, the Bureau of Labor Statistics releases the report at 8:30 a.m. Eastern Time on the first Friday of each month and covers the numbers for the previous month. The U.S. Nonfarm payroll number is an important factor which can affect the U.S. dollar, the Foreign exchange market, the bond market, and the stock market.
The data released also includes the change in nonfarm payrolls (NFP), as compared to the previous month. The NFP number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry.
In general, increases in employment means both that businesses are hiring which means they are growing and that those newly employed people have money to spend on goods and services, further fueling growth. The opposite of this is true for decreases in employment.
While the overall number of jobs added or lost in the economy is obviously an important indicator of what the current economic situation is, the report also includes several other pieces of data that can move financial markets:
1. The unemployment rate. The unemployment rate in the economy is reported as a percentage of the overall workforce. This is an important part of the report as the amount of people out of work is a good indication of the overall health of the economy, and this is a critical number that is used by the Fed when determining any action that might be needed in the economy.
2. Which sectors the increase or decrease in jobs came from. This can give traders a heads up on which sectors of the economy may be primed for growth as companies in those sectors such as housing add jobs.
3. Average hourly earnings. This is an important component to know, because if the same number of people are employed but are earning more or less money for that work, this has basically the same effect as if people had been added or subtracted from the labor force.
4. Revisions of previous month’s data. An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number.
In summary, employment in the economy is one of the most watched economic indicators, because employment drives every aspect of the economy. If the NFP comes out better or worse than expected, the markets can really react, (many times overreacting and settling down close to where they started.) Traders challenge: Look for the release of the NFP report this coming Friday morning May 5th at 8:30 am eastern and see how it affects the market!