The unemployment rate is defined as the number of people looking for a job. It is calculated as a percentage of the total labour force. It is the headline number of the report and a key part of the Federal Reserve’s evaluation of the US economy. It reflects the labor force that is not employed and its effects on the economy.
A crucial aspect to note here is that the employment rate is not directly proportional to the NFP figures, since an increase in the number of jobs might not alter the unemployment rate.
Generally, it is assumed that a drop in the unemployment rate reflects that there are less people actively searching for a job in the country. However, this is not always the case, given that the unemployment rate is calculated as a percentage, rather than the total number of people looking for a job.
Participation rate plays an important role here, as it provides the actual number of people who are in search of a job. These people are either underemployed or are completely out of work. This report doesn’t include the number of people who don’t want to work or are unable to work, such as a student or a stay-at-home dad or mom.
The NFP report provides information about an increase or decrease in jobs in each sector of the economy. It is useful for forex traders, since it provides insight into which sectors of the economy are growing and which are stagnating.
Job gains can lead to an increase in wages. If the same number of individuals are employed but are being paid more or less for that job, it has the same effect as subtraction or addition of people from the labour force.
This is an important aspect of the NFP report, which affects the prices in the market, as traders re-evaluate prices based on the numbers mentioned in the Revised report, particularly if the changes in the numbers are significant.
A high non-farm payroll figure is a good indicator of the health of the US economy. This is because an increase in jobs contributes to more robust and steady economic growth. Individuals with a job tend to spend more, leading to economic growth. Forex traders usually look for an increase of at least 100,000 jobs in a month. Any increase beyond this helps fuel the gains of the US dollar over other currencies.
Here’s a look at some of the other impacts of the NFP:
There are many other key economic indicators, such as personal spending power, retail sales with PCE and CPI, that affect the movement of the capital markets. But the NFP report is the most important one, since it provides insight into inflation, sentiment and potential growth via an all-in-one report. The NFP report impacts most financial markets of the world, although the quickest reaction is witnessed on US indices like the S&P500, NASDAQ and major currency pairs like EUR/USD, USD/JPY, GBP/USD, and gold and oil prices.