Nonfarm Payroll (NFP): A monthly assessment of the US jobs market Nonfarm Payroll (NFP): A monthly assessment of the US jobs market Nonfarm Payroll (NFP): A monthly assessment of the US jobs market

Nonfarm Payroll (NFP): A monthly assessment of the US jobs market

Macro 8 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  Nonfarm payroll is a key monthly indicator of the health of the US economy, and one that is tracked closely by traders and investors. We dig deeper into what the report includes, how to interpret the data, which instruments to use to express your views on NFP and how it can affect your portfolios.


The nonfarm payroll refers to the number of jobs added in the private sector and government agencies in the month. It excludes farm workers, private household employees, proprietors, non-profit employees, and actively serving military. The details of the release are as below:

  • Reporting agency: Bureau of Labor Statistics (BLS), a division of the Department of Labor
  • Report name: Employment Situation, consists of two surveys:
    • Establishment Survey, which tracks approximately 697,000 work sites for nonfarm payroll, work hours, and wage data, and
    • Household Survey of approximately 60,000, presenting data on unemployment and unincorporated self-employment
  • Release date: Mostly the first Friday of the month (reflecting previous month’s data)
  • Release time: 8:30 am ET

What data points to watch?

The nonfarm payroll report includes a number of key metrics, as listed below.

Nonfarm Payrolls

This tells us how many people started working in new jobs in the US economy. It includes the total number of full and part-time workers in every sector and industry, excluding farming jobs.

A subset of this numbers is reported as “Changes in private payrolls”, which excludes all new government jobs. Likewise, manufacturing payrolls would refer only to manufacturing jobs.

Unemployment Rate

This tells us how many people are looking for work in the labor force It is the percentage of unemployed people in the labor force. Note here that labor force includes people with a job or those that are actively looking for a job.

Average Hourly Earnings

This indicator, also often termed as wage growth, tells us how much people are getting paid. A high number usually indicates a tight labor market, where demand for workers is more than the supply. High wage growth can usually signal strength in the consumer and a likely upside in inflationary pressures.

Average Workweek

This component tells us how many hours people are working over a week. This is usually read in conjunction to the wage data.

Participation Rate

The participation rate is a signal of an economy’s active workforce. It is calculated as a percentage of people of ages 16 or older who are either working or actively looking for work, calculated off the total non-institutionalized, civilian working-age population.

This indicator usually adds light on the trends in unemployment rate. For instance, a big drop in unemployment rate may be meaningless if we see participation rate going down substantially. It simply means that some people have moved out of the labor force, say if they opted for an early retirement.
Figure 1: Snapshot of NFP data set. Source: Bloomberg

What do these numbers signal?

Nonfarm payrolls include 80% of the number of workers in the US, and therefore is a good signal on the health of the labor market despite suffering from the usual flaws of a survey. An expanding economy often coincides with a healthy labor market, while a weaker nonfarm payroll report reflects a slowdown in the job market which is taken as a negative for the overall US economy.

Rising job numbers and a declining unemployment rate can mean there are more workers in the economy to spend money on goods and services. If the average workweek numbers trend up, it can indicate production gains, which, in turn, can signal the need for companies to hire more workers or increase wage further.

Figure 2: Headline NFP change (in thousands persons). Source: Bloomberg, Saxo

The trend in the report over the months also tells us how tight are the job markets in the US, and whether the demand for workers is being met by the supply or not. If a steady pace of gains in headline NFP is seen over a few months, it can signal a tight labor market, suggesting demand of workers is outpacing the supply.

Figure 3: Unemployment rate (%). Source: Bloomberg, Saxo

Wage data can also be a signal on the tightness of the labor market, as steady increases in wages are consistent with supply falling short of demand. Wages are also seen as a signal on the health of the US consumer. High wage growth is consistent with consumers having a strong purchasing power, but that can also become a negative signal if the economy is overheating and inflation concerns arise leading some to believe that monetary policy could be tightened. Meanwhile, faltering employment or wage numbers can signal that consumer may tighten the purse strings, but it can also signal incoming rate cuts.

The report gives out not just the headline on new jobs added within the economy, but also details changes in unemployment by sector and demographics. This can help us to dive deeper to analyze the health of certain sectors. For example, the services sector collapsed during the pandemic but has shown a strong recovery after the global reopening.

In summary, this data set gives a comprehensive look into the US jobs market, which can be a leading indicator for economic growth and a key input for policymakers. However, the direction may not always be entirely clear, which is what usually leads to a lot of volatility. Just remember that one month’s data can have little information value, and it is always more important to look at trends in the economy and a cumulative set of different data points when making investment decisions.

Market instruments that can react to NFP

The NFP report can potentially create a large market volatility. While this may create profit opportunities for some traders, the erratic price movements also mean that spreads can widen and lead to margin calls. Therefore, it is important to have strict risk management rules in place, such as stop-losses or minimal/no use of leverage, when trading the NFP report. Most commonly used instruments to express a view on the NFP include:

  • Indices like NASDAQ (USNAS100.I) or S&P 500 (US500.I)
  • USD FX pairs such as EURUSD and USDJPY
  • US Treasury Bonds
  • Yield-sensitive commodities like Gold and Silver
  • Other commodities that are priced in dollar, such as crude oil

Traders should take note that some of the other currency cross pairs beyond the USD pairs may also display an increase in volatility when the NFP releases.

How to trade the NFP?

Momentum trading

This usually means that you trade in the direction of the release. This strategy is mostly suitable when there is a broad-based beat or miss in the various data points of the NFP report compared to consensus.

For instance, if the headline jobs numbers, unemployment rate and wage data, all signal a robust US jobs market, that can be a positive signal on the US economy. But depending on where growth and inflation is in the current cycle, if the market expects that Fed has more ammunition to tighten monetary policy, then that is a positive for US dollar but negative for risk assets and equities.

Figure 4: An example of momentum trading. Source: Bloomberg, Saxo

Fade the data

This strategy is based on trading against the initial market reaction to the release. It usually makes more sense when headline jobs numbers and details are a mismatch. Usually the algos and inexperienced traders will react to the headline print, providing an opportunity to professional traders to fade the move once the initial buying momentum is nearing an end.

For instance, a strong headline print may give an initial boost to the US dollar, but if the details are patchy, professional traders could use the higher prices to short the greenback at a more favourable price.

Another extension of this strategy could be to fade the move on Monday especially if Friday’s reaction was large.

Figure 5: An example of fading the move. Source: Bloomberg, Saxo

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