Wednesday, June 04, 2014

The Importance of the Nonfarm Payroll Report

The monthly employment report gives the market an idea of the strength of the U.S. Labor Market. The Nonfarm Payroll, or NFP report, as it is commonly called, is generally released on the first Friday of each month, which is this Friday, June 6th. Incidentally, next month July, 1014, the first Friday of the month falls on the 4th of July holiday, so the NFP report is scheduled to be released on Thursday the 3rd, the day before the normal release date.

The nonfarm payroll employment report is the monthly report released by the United States Department of Labor as part of a comprehensive, monthly 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 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 additional data that can move financial markets.

This additional information includes:

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. This is a critical number that is used by the Fed when determining any action that might be needed in the economy.

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.

Revisions from Previous Month’s Report – An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number.

Why is this report important? Employment is one of the most important and most watched economic indicators because it drives many aspects of the economy. If the NFP comes out better or worse than expected, the markets can react greatly, especially as the Fed has been using employment as a barometer of how well the economy is doing and how the economy is reacting to the current Fed’s stimulus “tapering”.

So look for the release of the NFP report this coming Friday morning, June 6th, at 8:30 a.m. ET and see how the markets react to the release.

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