What is the non-farm payrolls?
.Non-farm payrolls
• The monthly US non-farm payroll number is probably the most important single monthly statistic
• That’s because it’s a) the first official statistic released about the preceding month and b) the US Fed considers employment conditions as well as inflation when setting policy.
• Markets tend to slow down ahead of major indicators like this and there can be considerable volatility after they are released, so our clients should be careful ahead of them – or on the other hand, they might want to take a view on what the figure will be.
• That’s because it’s a) the first official statistic released about the preceding month and b) the US Fed considers employment conditions as well as inflation when setting policy.
• Markets tend to slow down ahead of major indicators like this and there can be considerable volatility after they are released, so our clients should be careful ahead of them – or on the other hand, they might want to take a view on what the figure will be.
What is it?
It’s not possible to ask every person in the country every month whether they have a job, so statistical agencies use two different ways of estimating the employment situation. One is to do a survey of people to find out who has a job and who doesn’t; the other is by calling up companies and asking them how many people they employ. The US does both. The first method, called the household survey, is where they get the unemployment rate from. They call up a lot of people and see who has a job, who doesn’t, and who isn’t even looking for a job. Then they figure out how many people want to work but can’t find a job and that’s the unemployment rate.
The other method, called the establishment survey, involves calling up a lot of companies and asking them how many people they employ. That figure is called thenon-farm payrolls, i.e. how many people were on the payroll of companies excluding farms.
The two series frequently diverge month-to-month – in fact, they’ve only moved in the same direction 54% of the time – but the differences even out over time and over the longer term they move together.
Why is this so important?
There are three reasons the US employment data is so important. First off, it’s a good indicator of the economy. More people working means more people spending, and that’s important when 70% of the economy is consumption. Secondly, it’s one of the first pieces of economic data we get every month: the figures are released only a few days after the end of the month that they cover. For example, the November figures are coming out today, Dec. 6th. By comparison, the November industrial production figures won’t be out until Dec. 14th, the November personal spending figures Dec. 21st, durable goods Dec. 24th, etc.
But perhaps the biggest reason is that the US Federal Reserve, the central bank, watches them closely. Most central banks are only required to watch out for inflation, but the Fed has a dual mandate. The law that establishes the Fed as the central bank of the US says the Fed must “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” So a change in the employment situation can cause the Fed to change interest rates, which are the key variable for many other financial markets (including foreign exchange).
Why not use the unemployment rate?
You might ask, why do they use the non-farm payrolls? In most other countries, people look at the unemployment rate.
It’s because the unemployment rate can go up when the employment situation is improving. The unemployment rate is the ratio of two numbers: the number of people working divided by the labor force — not the total population, because a lot people, such as housewives, aren’t interested in working to begin with. When jobs are hard to find, many older or less skilled people get discouraged and give up looking for a job and therefore aren’t counted as unemployed and aren’t considered to be in the labor force. When employment conditions improve however they start looking for work again and suddenly are counted again as in the labor force. So even though the numerator goes up, the denominator can go up by even more and the unemployment rate rises even though the number of people with jobs is rising. That’s why the US uses the number of jobs, not the unemployment rate.