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How to read the US NFP report?
Written by: PaxForex analytics dept - Tuesday, 02 December 2014 0 comments
The non-farm payroll report or NFP report out of the US is often considered the most important economic report released out of the US. Forex traders often try to position their portfolios prior to the release in order to take advantage of the increase in volatility that usually accompanies the release of the NFP report. When is the NFP report released? The NFP report is released every first Friday of the month for the previous month.
The biggest mistake many forex traders make, especially new ones, is that they focus on the headline figure as well as the unemployment rate. What is the headline figure? When the NFP report is released it is in most cases revealed in the following format: An increase/decrease of 220,000 and an unemployment rate of 6.0%. The 220,000 in this example is referred to as the headline figure. Focusing on the headline figure is a grave mistake.
What should forex traders be focused on when the NFP reports is released? The first thing is the composition of the headline figure. Forex traders should take a look at the full-time positions as well as part-time positions created or lost. A solid report will show the majority of gains in high-quality full-time jobs. Most of this year’s NFP report’s showed a loss in full-time positions and a gain in part-time jobs. One of
the biggest examples was this year’s biggest NFP report which showed a headline gain of around 300,000, but the composition showed a loss of 500,000 full-time jobs and the addition of 800,000 part time jobs. This means that the NFP report was terrible despite the strong headline figure.
When it comes to the unemployment rate, the way the US government counts it is misleading. For example if an unemployed person gives up on finding employment the government stops counting this person as unemployed. The main driver behind the sharp drop in the US unemployment rate was the exodus of unemployed people searching for a job and not unemployed finding an open position. Forex traders should also keep in mind that each month over 150,000 new eligible workers enter the labor force. This makes the labor force participation rate one very important data point.
Average hourly earnings is another key component of the NFP report which many new forex traders ignore to pay attention to. Average hourly earnings have been stagnant which means American workers do not get paid more and their spending power remains subdued which is negative for the economy. Another component is the average hourly workweek which has been stuck at 34.6 hours per week. The final component is the revision to the previous two reports which needs to be added/subtracted to the headline figure.