Lesson 64 – Trading the News: Non-Farm Payrolls (NFP)

Topic Progress:

In our last lesson we finished up our discussion on GDP with a look at the different components which make up the number and why these are important to traders. In this lesson we are going to begin a discussion on several other economic releases, which are timelier than GDP and are therefore looked at by traders to get an earlier feel for what is happening in the economy.

As there are so many things which can be measured in an economy, there are tons of economic releases every month, with new numbers coming out on almost a daily basis. With all this data it is easy to get overwhelmed when looking at the economic calendar and trying to determine what is important to us as traders. While the importance of different economic indicators to the markets changes depending on current economic conditions, there are approximately 10 major economic indicators that have and always will be important to the market. Most of the other data that is reported throughout the month is similar to one of these 10 indicators, so once we have an understanding of the main numbers everything else will make a lot more sense.

Before getting started here it is important to understand that economic releases are designed to try and give a picture of either:

  1. What has already happened in the economy based on past numbers (referred to as a lagging indicator)
  1. What is anticipated going forward based on past numbers. (referred to as a leading indicator)
  1. What is happening right now based on current data. (referred to as a coincident indicator)

Economic indicators are designed to try and give a picture of the growth the economy is experiencing, the level of price increases or inflation that the economy is experiencing, or both.

One of the most important and therefore market moving economic numbers after GDP is the Non Farm Payrolls (NFP), which is released at 8:30 am on the first Friday of each month. Released by the Bureau of Labor Statistics the Non Farm Payrolls 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. The Farming Industry is not included because of its seasonal hiring which would distort the number around harvest times as farms add workers and then release them after the harvest is complete for example.

As with GDP, there is a huge amount of data published along with this report, all of which you can see on the Bureau of Labor Statistics website (bls.gov).

In general increases in employment means businesses are hiring which means they are growing and also that more people are employed so more people have money to spend on goods and services further fueling growth. The opposite of this is obviously true for decreases in employment.

While the overall number of jobs added or lost in the economy is obviously an important current indicator of what the economic situation is, the report also includes several other pieces of data which can move the markets:

  1. What the unemployment rate is in the economy 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 number that is watched by the Fed as when it becomes too low (generally anything below 5%) inflation is expected to start to creep up as businesses have to pay up to hire good workers and increase prices as a result.
  1. What 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.
  1. Average Hourly Earnings. This is an important component because if the same amount 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.
  1. Revisions of previous non farm payrolls releases. An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number.

As with all the economic numbers that we study after following the release for several months in a row you will get a feel of what the market is focused on and how it will most likely react should the number come in off estimates.