Employment and Non-Farm Payrolls

Employment figures give an indication of the underlying strength of the economy. Increasing the employment of the work force indicates that more jobs are being created and the economy is expanding. Conversely, unemployment indicates a contraction in business strength. This equals less spending power for the consumer but places a greater drain on government reserves.

Unemployment Rates are normally given as a percentage. This figure represents the number of unemployed workers as a percentage of the total labor force available and willing to work.

Forex markets watch the release of these figures closely as they tend to be one of the best gauges of economic growth and more importantly, the potential for future growth. A small number of unemployed people in the workforce shows that most of those who are seeking jobs are finding them. This is turn can be interpreted that businesses are doing well and that the economy is expanding. A Rising unemployment figure however, can indicate that businesses are struggling and the economy is contracting.

All countries provide a scheduled release of employment figures and these will have a similar effect on the currency of the underlying market. One special case is the US Non-Farm Payrolls release. This deserves special mention and we cover it in more detail below.

Non-Farm Payrolls

Non-Farm Payrolls report is a leading indicator of employment rates in the United States and is generally regarded as the ‘big one’. The United States is the largest of the global economies and a high level of emphasis is placed upon the report . It has proven itself to be one of the most significant economic indicators in recent years. The old adage ‘when America sneeze’s the rest of the world catches a cold’ is why so much emphasis in the Forex markets is placed on the figures contained within this report.

The Non-Farm payrolls figure is reported by the US Bureau of Labor Statistics. It surveys a number of businesses in order to provide a detailed report on employment, hours worked and average earnings on the payroll. The report estimates the total number of paid workers in the United States, excluding Farm Workers, private household employees, employees of no profit organisations and general government employees. The remaining “non-farm” payroll employees contribute to the production of around 80% of the US Gross Domestic Product GDP).

Non-Farm payrolls data is released to the market on the first Friday of every month. Increases or decreases in non farm payroll data are used as an indicator of US economic health, since the report highlights whether businesses are adding to or subtracting from the job pool.

A better-than-expected figure is often very bullish for the US dollar, whereas a worse number usually results in traders referencing the unemployment rate to see whether the change was positive, negative, or unchanged from the previous release. A decrease in the underlying month on month employment rate would be seen as Dollar bearish because of the implication that the economy is slowing.

NFP figures will tend to cause a significant amount of volatility in Forex markets both prior to and after release. For this reason many traders will sideline the markets or close open positions until the volatility subsides and the direction in markets becomes clearer.

Next: GDP