Nonfarm Payrolls: What Investors Should Know
For investors, they have a wealth of data points to choose from when making trading decisions. Some of these may be monthly or quarterly such as unemployment, the Consumer Price Index (CPI) or Producer Price Index (PPI). Another popular measure of the US economy is nonfarm payrolls (NFP). This monthly survey is a snapshot of US workers, under specific categories, that contribute to the GDP.
Read on to learn more about this.
What is NFP?
How can you define non farm payroll?
Non-farm payroll (also known as Total Nonfarm Payroll or NFP) is a key economic indicator that can provide insight into the current state of the economy. This is a monthly count of the number of paid US workers in businesses that aren't farms, private households, or non-profits. NFP also excludes unpaid volunteers, the unincorporated self-employed, and military personnel; its measure accounts for approximately 80 percent of the workers who contribute to Gross Domestic Product (GDP).
How does Nonfarm Payroll Work
NFP is released monthly by the US Bureau of Labor Statistics, usually on the first Friday of the month. The headline figure in the report represents the number of jobs added or lost in the economy over the previous month. This figure is then compared to the previous month's release to gauge the health of the economy. The report's data also indicates whether businesses are growing and hiring and also includes other important information, such as the unemployment rate, average hourly earnings, and sector increases or decreases.
Why Nonfarm Payrolls Matter
The non farm payroll report is important because it can help identify trends in economic growth, inflation, housing starts, and GDP, all of which can affect financial markets. It also reflects the overall monthly change in wages for U.S. employees across a majority of sectors. Rising figures may indicate economic growth, but they could also raise flags for investors regarding potential inflation. Declining numbers might point to broader economic issues that warrant attention.
So what is non farm employment? Take a look.
Government
The government industry includes civilian government employees, but excludes government-appointed officials, employees of certain agencies, and active military employees. This sector represents 25% of total employment in the United States.
Goods-producing
Goods-producing industries, which encompass mining, construction, and manufacturing, represent approximately 14% of employment in the United States. These sectors are typically more responsive to economic fluctuations, making them valuable indicators for identifying turning points within the business cycle. For example, as economic conditions begin to deteriorate, production in these industries often experiences a decline ahead of other sectors.
Private service-providing
Private service-providing industries includes professional and business services, financial activities, and education and health services. This sector accounts for 71% of total employment in the United States.
How Does NFP Data Affect Stock Markets
The monthly nonfarm payroll (NFP) report can have a significant impact on the stock market.
Strong jobs report: Can lead to higher stock prices because investors feel confident about the economy. Companies may also have more revenue to invest in growth. However, if inflation is a concern, the Federal Reserve may respond to a strong report by raising interest rates to cool the economy, which could cause the stock market to go down.
Weak jobs report: Investors may become concerned about the economy's health. However, if employment is low, the Fed may pause or slow rate hikes, which could stimulate the market and increase stock prices. Keep an eye on market, including the different rising and falling sectors, through moomoo's investment themes content.
Expectations: If NFP numbers come in above expectations, it could surprise the markets and have a positive impact. Or, if the numbers miss estimates, it could have a negative impact.
Nonfarm Payrolls and Economic Analysis
NFPs exclude workers in farms, private households, the federal government, and nonprofit organizations, but include workers in both goods-producing and services-producing sectors. This measure accounts for about 80% of workers who contribute to the Gross Domestic Product (GDP).
NFPs can provide insights into the current economic situation, such as whether businesses are hiring and the economy is expanding. For example, strong employment numbers could indicate a robust job market and rapid economic expansion, which could lead to inflationary pressures. In this case, the Federal Reserve might consider raising interest rates to control inflation. On the other hand, decreasing numbers could suggest broader economic concerns.
How to Trade the Nonfarm Payroll Report
The non-farm payroll (NFP) report is a popular trading opportunity for forex and indices traders. Here are some tips for trading it:
Research analyst predictions for the NFP numbers
Select an asset to trade such as currencies
Consider timing: An investor can trade either before or after the report's release. Trading before the release involves predicting the market's direction, but it's riskier because an unexpected figure could create gaps in the market. Trading after the release is more cautious, but the initial reaction to the headline isn't always the end of the market's movement for the day.
Monitor the market and consider trading strategies: Watch the markets before and after the NFP release, and adjust and close positions as needed. An investor can also use technical analysis to help with trading decisions.
FAQs about Nonfarm Payrolls
When are nonfarm payrolls released?
The Nonfarm Payroll Report (NFP) is usually released on the first Friday of each month at 8:30 AM ET.
Is Nonfarm Payrolls an indicator that leads or lags?
Nonfarm payroll report is neither a leading nor lagging indicator. It's a key indicator that shows events that have an impact on the overall economy.
How does non-farm payroll affect the dollar?
Nonfarm payrolls (NFP) generally have a positive correlation with the US dollar. When NFPs are higher than expected, the dollar tends to strengthen, while lower-than-expected NFPs can weaken the dollar.
NFPs can also affect the dollar in additional ways. They can impact inflation, which can influence the Federal Reserve's monetary policy. NFPs can also indicate the strength of the US labor market and the economy as a whole. And surprise NFP results can have a big impact on the market, regardless of whether they are higher or lower than expected.
What happens if NFP rises or falls?
The Non-Farm Payroll (NFP) report can have a significant impact on financial markets and indicate different things about the economy.
When NFP rises: Can indicate economic expansion, but may also concern investors about inflation. A strong jobs report can lead to higher stock prices as investors feel confident about the economy. The U.S. dollar often rises when the NFP is stronger than expected, as it indicates a stronger labor market. The U.S. may also increase interest rates, which leads to more forex traders buying the dollar and the dollar price appreciating in the forex market.
When NFP falls: Can suggest broader economic concerns. A weak jobs report can have the opposite effect on the stock market, as investors become concerned about the health of the economy. The U.S. dollar often depreciates against other currencies when the NFP is lower than expected, as the U.S. may decrease interest rates. This can lead to more forex traders selling the dollar, which causes the dollar price to depreciate in the forex market.