What Is Non-Farm Payrolls?

Non-Farm Payrolls (NFP) is released as part of the Labour Situation Report and contains several metrics on the US labour market. NFP is one of the most important releases in the economic calendar and can cause a high amount of volatility in the markets. It measures the number or jobs added or lost compared to the previous month.

What are Non-Farm Payrolls?

Non-Farm Payrolls is typically the most important part of the Employment Situation Report and is often referred to as the headline number. It measures how many jobs were added or lost compared to the previous month. So, if the headline is showing a positive 206,000, that means 206,000 new jobs were added.

NFP is an easy one to remember as it’s typically released on the first Friday of each month, and it can cause a huge amount of volatility in the markets - before, during and after as it directly relates to economic growth and inflation. 

In fact, the impact can be felt in the markets days before and after the release. For the Duomo Method, this is one release we definitely try to avoid trading during.

The release also includes a breakdown of where jobs were added or lost by different sectors, which can help us see which sectors are performing well or struggling.

As the name “Non-farm” may suggest, it doesn’t include farm workers. That’s because farming is seasonal which can distort the numbers. There are certain times of the year where farmers will hire more, and pay more.

This may not be such a big issue these days, but when the BLS began its surveys back in 1988, the US was more of an agrarian economy than it is now. It also excludes private household employees, non-profits and military organisations.

While NFP is often the most important part of the release, it’s also important to take into account the other parts of the release as they can change the context. This includes the unemployment rate and average hourly earnings. 

It’s also important to take into account any revisions to the NFP number from previous months. For example, if previous numbers are revised higher, the labour market may be stronger than previously expected.

Household and Establishment

There are two sections in the release:

• Establishment
• Household

The NFP release is based on 400,000 companies in the establishment survey section. But there are also 60,000 households in the household survey section.

The household side is taking information from all households, which includes workers from every part of the economy, whereas the establishment only measures private non-farm businesses. 

There are a few other differences in the methodology between the two, such as double counting in the establishment survey if someone has two jobs. And the household survey has an age limit.

This means the household section could be better for a broader employment gauge throughout the economy, including farms and the military. That’s also the one used for the unemployment rate. However, the establishment survey is seen as the more important one due to the bigger sample size and it’s based on official payrolls.

Unemployment and the Economy

NFP is important because 70% of the US economy relies on consumer spending. 

More jobs and wage growth will boost economic growth as people are more likely to spend more money. That means a positive jobs growth number should be positive for economic growth, and vice versa for a negative number.

These numbers will also be scrutinised by analysts and companies, which may use them to make decisions on expanding and hiring, which would add to Gross Domestic Product.

The Federal Reserve will also pay particular attention to data on the labour market, since their dual mandate is to achieve price stability and maximum employment. In fact, NFP data can have a direct effect on monetary policy. 

If there’s a low number of jobs being added, the Fed may loosen policy to increase output and, hopefully, result in more jobs. However, looser monetary policy often means lower interest rates and that can reduce demand for the US dollar. 

On the other hand, strong NFP readings could signal the labour market is running hot and monetary policy needs to be tightened to avoid inflation.

Basically, positive numbers from NFP signal the economy is growing. However, several high readings while unemployment is low could be a sign the economy is running hot leading to rising inflation. Maximum employment is based on NAIRU, which is the highest point the economy can sustain while maintaining stable prices.