The U.S. Non-Farm Payrolls Explained

The U.S. Non-Farm Payrolls Explained

The non-farm payrolls report simply measures the level of change in the number of employed people month-on-month, with the exception of agriculture (farming) sector. The US NFP report is issued by the U.S. bureau of Labor Statistics.

This is one of the first reports published every month that is related to human resources, where it measures the pace of job creation by American employers. It is one of the most economic reports as it reflects the health of the labor sector that affects household consumption, which is highly correlated with human resource conditions and accounts for a large part of GDP. The better the NFP data, the positive impact on the U.S. economy and the dollar.  

What is the usage of NFP?

The data is mainly used to assist policymakers in determining the current state of the economy and predicting future levels of economic activity.

In the United States, spending of the consumers or workers is a major indicator of economic activity, and non-farm payrolls represent 80% of the U.S. workforce. The farm jobs are excluded from employment figures as it is seasonal.

The effect of NFP on the overall economy

In general, the increase in employment means that businesses are hiring and they are growing, those newly employed people have money to spend on goods and services, further fueling growth and economy. The opposite of this is true when employment decreases.

The overall number of jobs added or lost in the economy is obviously an important indicator of the current economic situation.

Federal Reserve and NFP

The jobs market has become an area of key focus for investors and market participants since US Federal Reserve ties monetary policies with economic performance. For this reason, financially markets are particularly sensitive to the NFP releases.

The unemployment rate in the economy is as a percentage of the total labor force. This is an important part of the report as the number of unemployed people is a good indicator of the overall health of the economy. Low jobless rate (generally less than 5%) is expected to start raising inflation because companies have to pay up to hire good workers. This would result in initial rise in prices as workers demand higher wages causing an increase in inflation. In macroeconomics, this is known as the wage spiral.

As inflation goes up, the Fed may start hiking interest rates and thereby this should give support to the green currency.  

In addition, investors go for the sectors that have high employment rate as it is an indicator for a healthy sector.

The average wage earnings per hour as 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 as this will effect on the spending of the household sector on products in the market.

In this case, policymakers and investors have to revise the previous nonfarm payrolls releases and compare with the current ones and not to make any decision after the release of the data immediately and to wait to see the effects on all sectors. 

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