Every month on the first Friday at 8:30 AM EST, NFP Report is the most important employment report that is released by the US Bureau of Labor Statistics (BLS). NFP Report has the potential to jolt the financial markets and all the USD currency pairs. The employment situation in any economy is a very important thing. If the majority of the people have jobs meaning employment rate is high, it means people have purchasing power and they can go and buy things in the shops. On the other hand if the unemployment rate is high, it means people don’t have the income to buy things in the market. When products don’t sell, inventories pile up and companies start feeling the pain which can lead to more layoffs.
Employment Situation Report
This report is very important for forecasting the future economic activity. This report is released by BLS on the first Friday of each month at 8:30 AM EST. This report can make the market move big time. Sometimes this movement is directional and other times it can be a whipsaw with the market moving up and down. We will discuss why below later. Before this report is released a select few financial reporters are allowed by BLS to see the report at 8:00 AM EST in their secure room that have a very high level of security. All smart phones are taken away before the reporter can enter the long room. There are desks in that conference room where that report is placed. They are allowed to see the report and at exact 8:30 AM EST, they are allowed to email their analyses of the report back to their offices. Now if you have traded this report you know the suspense before the release of this report and at exact 8:30 AM EST market become active and either price shoots up or down with rapid speed. Now you know why this happens.
This report is also known as the Jobs Report. This report is very timely as it releases the data of the past month within the first week of the next month. It gives the traders and investors a good idea of where the economy is heading. There is always an expected number circulating in the market before the release of the jobs report but it is always very hard to tell what the exact actual figure will be. This month the market was expecting a figure like 185K new jobs created last month but the actual number when it came out jolted the market as US payrolls increased by 517K last month. You can see how the different currency pairs reacted big time as the market had been surprised big time.
Red arrow shows the time at which the report is released. GBPUSD was going up in anticipation of a lower figure but when the actual report figures came out it just dropped like a stone 200 pips. Employment Situation Report gives you a good idea on how many people have jobs, how many have full time jobs, how many have part time jobs, how many people are looking for a job actively and how many have given up looking for any job. BLS infact carries out two surveys that are designed to measure employment situation in the economy. The first is the Household Survey and the other is the Employment Survey.
The Household Survey
The unemployment rate mentioned in the Employment Situation Report is actually part of the Household Survey. The BLS Household Survey every month asks around 60K people spread across the country a few questions about their employment situation. Military personnel are excluded from this household survey. BLS employment information is very detailed and gives information according to age, sex, ethnicity, marital status, education etc.
How do you classify that this person is employed or unemployed? It depends on how you define employment and unemployment. According to BLS employment definition any person over the age of 16 is considered employed if he/she has done paid work during the survey period which is obviously the last month. People working in their own business, in their profession and on their own farm are included in this definition. People who have worked for at least 15 hours in their own business or farm without pay are also included. A person who is full time or part time unemployed in the previous month and had been looking for a job actively during the last fours weeks are included in the unemployed category. If the person didn’t actively looked for the job during the past 4 weeks, that person is considered a discouraged worker and not considered in the labor force.
The Establishment Survey
The Establishment Survey is different from the Household Survey. Establishment Survey is also known as the Payroll Survey. For the Establishment Survey, BLS interviews 140K businesses, non profit organizations and all levels of government for their payrolls. Military personal, self employed people and domestic workers are excluded from the payrolls survey. BLS asks about the number of jobs created, hourly compensation and number of hours worked against each job. The survey data is tabulated, adjusted for seasonality and broken down into industry and geography in the report released.
You might asks what is the purpose of taking two different surveys to measure the same things. There is a difference between the two surveys. The Household survey includes the farm workers also known as agricultural workers, domestic workers and self employed people. The Establishment Survey excludes these categories from its payroll survey. The Household survey breaks the employment into full time and part time categories but the Establishment Survey does not.
Household Survey only includes the US residents while the Establishment Survey also includes Mexicans and Canadians who are working in US. If the person holds multiple jobs, Household Survey counts it as one while Establishment Survey counts each job separately. Despite all these differences in their counting, Household Survey and the Establishment Survey rarely give conflicting results. If there is a clash between the two survey results, you will have to dig deep into the details. These two surveys sample the job market and help build a good picture of the US job market. These two surveys help build the Employment Situation Report. Job market has seasonal changes. In summers students take summer jobs which can make the job count very good. During holidays retail jobs can increase the job count. Seasonal jobs are temporary jobs and don’t last long. BLS adjusts the job count for seasonality. Now these surveys have 90% confidence level so you must always add or subtract 100K jobs for the actual figure. This gives the band in which the actual population job figure should lie.
Household consumption accounts for 2/3 for the US GDP. This is the main reason that the financial markets pay so much attention to the monthly release of the unemployment report. More jobs means more spending and less jobs means less spending. Civilian workforce is the count of persons 16 and above classified as employed or unemployed by the BLS. This excludes the military personnel. Employment Survey is also known as the Payrolls Survey.
Household Survey gives the main unemployment figure this is a phone survey that is conduced each month. These are the questions that are asked in the Household Survey: Are you working? Is your job part time or full time? If you are not working, how many weeks you have been unemployed? How many weeks you have been looking for work? Around 60K randomly selected people from across US get contacted via phone and the response rate is roughly 95% which is very good. As you can see the questions asked on the phone are very simple and people eagerly answer these questions without much hesitation. Household Survey data is very valuable and gives a lot of information on the jobs according to age, sex, race, educational level and the marital status. Teenagers have the highest unemployment rate followed by blacks and Hispanics.
Now there is a question of integrity when answering the questions on phone. Some people may say they are employed when in fact they are unemployed. Due to this fact, Establishment Survey also known as Payrolls survey is considered more accurate as it surveys 440K corporate and government work sites. These 440K establishments employ more than 50M workers. These 440K establishments are contacted via phone and mail and the initial response rate to the survey is between 60-70%. So the first estimate of the unemployment is based on these initial response. With some time the response rate can become higher than 80% and in the second month, BLS issues a revised estimate. But the financial market is only interested in the initial first estimate that is released on the first Friday of each month and does not pay much attention to the subsequent revisions by BLS. Mostly the small business firms are late in sending their response. Small businesses are the first to hire and fire also. So their inclusion in the Payrolls Survey is very important in making the unemployment figures accurate.
