Non farm payrolls: an overview of the economic indicator
Many traders trade successfully using technical analysis. Those who use technical analysis are sure that all the necessary information is already included in the price dynamics – it is enough to interpret it properly in order to predict further changes. But there is another approach – news trading.
Rather than carefully analyzing price charts and applying multiple indicators to them, these traders read the news and assess where the asset’s price might go. Non farm payrolls are one of the news indicators that you should focus on when trading Forex.
How does Non farm Payroll affect forex?
“Non farm payrols” is one of the most important indicators that allows traders to determine the fate of a currency pair in the medium term. Those who know English can easily guess that it shows how many jobs have been created in all sectors of the economy, with the exception of the agricultural sector. This economic indicator demonstrates the state of the US economy, which, in turn, affects the dollar exchange rate. NPP also influences the market for oil, gold, and some other assets, but today we will focus on the foreign exchange market.
The report is released at 9:30 am local time. The publication date is the first Friday of every month. The indicator demonstrates how things are in certain segments of the American economy. If the number of jobs in a particular area increases, then the economy of this area is on the rise. Conversely, job cuts signal a deteriorating economic situation in the industry.
This report shows which sectors generate the most profit or loss. NPP includes all types of services, retail and wholesale trade, financial activities, resource extraction, health care, construction, production of goods, transportation, warehousing, informatization, entertainment, tourism.
Why is it the number of jobs that is such an important indicator of the American economy? The point is in its features. In the American economic system, an important (if not the most important) role is assigned to consumers, which are the workers reflected in the NPP. The development of the entire American economy depends on their well-being.
If there are a lot of workers and they receive decent wages, the economy grows – they are able not only to produce, but also to buy, stimulating an improvement in the economic situation. If wages are falling and jobs are shrinking, consumers have nothing to buy goods and “sponsor” the economy.
What happens if the industry quickly creates new jobs to reduce unemployment? In this case, the costs of firms for production increase (the number of employees grows, and with them the cost of labor, which is usually expensive in America).
To compensate for these losses, firms will naturally increase prices for their services and goods, but the financially secure population will be able to afford all these products.
During the publication of the report, certain patterns have been identified. As a rule, the best growth in employment and income of the population is observed in May, and the largest reduction should be expected in August. The best year on record was 1994, adding 3.84 million jobs. The worst is 2009, following the global economic crisis, with 5.04 million Americans jobless.
Distinctive characteristics Non farm payrolls
When talking about Nonfarm payrolls, traders sometimes say that this indicator “moves the markets.” It may sound too dramatic, but in fact, it is – the report on the number of jobs is one of the decisions in the currency market. It largely determines the dollar exchange rate, namely the dollar is the base currency in Forex. “Non farm payrolls” is capable of reversing trends or creating sharp jumps in quotations, and this has already been confirmed many times in practice.
The point is not only that NFP perfectly shows the real state of the US economy, but also that this indicator is almost impossible to predict. Many analysts agree that Non Farm Payroll is an unexpected indicator, and each new value is strikingly different from the previous ones.
Even if you find forecasts of this value from eminent analysts and experienced traders, you should not take them for granted – NFP can surprise, and often the real value turns out to be very far from the predicted one. Conscientious specialists always clarify that the NFP forecast is extremely rarely correct.
NPP is an indicator that is important for the economy of not only the United States, but the whole world; the Federal Reserve System is also interested in it. It regulates the size of interest rates and can lower rates based on the published indicator. This affects the entire Forex market.
If the number of jobs is reported to be declining, then the Fed may lower interest rates to regulate the economy, as a countermeasure to market weakness. This will change both the foreign exchange and stock markets – with a decrease in rates, the dollar rate begins to gradually decline. Accordingly, in general, low NFP indicators are a reason for buying the dollar, and high ones – for selling it.
How the output of statistical data on the indicator is processed Non farm payrolls
Each economic event can be viewed as a combination of three values:
- previous (that is, Non farm payroll for the previous reporting period);
- predicted (which value will be next in the opinion of analysts);
- actual (the real value of NPP after the publication of the report).
If the predicted value turns out to be less than the actual value, then they speak of a bullish vector. Conversely, when the forecast is higher than the actual value, traders call it a bearish vector.
Non farm payroll is used on the stock exchange not as a separate indicator “in a vacuum”, but as a ratio of the current indicator to the previous one. If the difference is up to 40 thousand, it is unlikely to cause strong unrest in the market. A short-term small jump in quotations is possible, but such an indicator will not reverse trends. If the difference in values reaches 100 thousand or more, then such a change can provoke serious movements in quotes, including a trend reversal.
How information is collected for Nonfarm payrolls
To calculate this indicator, two characteristics of the labor market are used:
- Organized employment indicator. It is collected from payrolls. Of course, the statements are collected for all sectors, except for agriculture. This is how the indicator compilers know how many people are employed and how much money they receive. When collecting statements, about 400 thousand companies are interviewed.
- Self-employment rate. Self-employment is very widespread in the United States, but it is extremely difficult to calculate it as accurately as organized employment. Therefore, the compilers of the indicator survey 60,000 able-bodied, self-employed people. The sample includes people who are engaged in their own business. If a person has no income and no business of his own, he does not fall into this list. It also excludes those Americans who have tried to find work in the last month, but have remained unemployed and have no business of their own.
The indicator itself also contains information:
- about the length of the working week;
- average wages per week;
- average hourly wages.
Traders often use Non Farm Payrols to identify the current state of various areas of the US economy. When there is a massive loss of jobs in a particular segment, it indicates that economic activity is weakening. Moreover, if the level of hiring rises, then, consequently, the economic situation in a particular industry improves. If these values rise, the dollar strengthens; if not, on the contrary, it is weakening and losing ground.
The Nonfarm payrolls indicator is a very important indicator for forex traders. In no case can you ignore it, otherwise you may not notice a trend change or a jump in quotes. However, it should always be remembered that an accurate forecast of Non farm payroll is impossible.
Non farm payroll is useful both on Forex and on the stock exchange – demonstrating the prospects of certain sectors of the economy is necessary for effective trading in American stocks.