How to Analyze Non-Farm Payrolls

Markets are prone to exaggerating financial news and events, and it is not always the case that a heated and chaotic reaction in the price action is reflective …

Markets are prone to exaggerating financial news and events, and it is not always the case that a heated and chaotic reaction in the price action is reflective of a crucial piece of new information. But there are two types of data which are greeted with excitement and turmoil by market actors, and with good reason. One of those is the main rate of the Federal Reserve, which determines the cost of borrowing for all corporations and individuals in our economy. The other is the non-farm payrolls data which is a powerful indicator of future prosperity and stability for the United States.

Non-farm payrolls are so important because of the impact consumers have on the American economy. Consumer spending is always a very important component of the equation determining a nation’s economic performance. But in some other nations, such as Germany or Japan, citizens are a lot more conservative about their spending habits, and in spite of generous pensions and unemployment insurance, they are unwilling to enjoy life to the full potential of their earnings. Americans are different. Until recently, individual savings in this nation stood at an incredible zero percent per annum while. American consumers spent all that they earned, and their spending accounted for more than two thirds of the nation’s GDP. All that spending frenzy sponsored jobs and businesses, and higher GDP growth in comparison to peers of the U.S. in the developed world.

The non-farm payrolls release from the Bureau of Labor Statistics (BLS) captures the monthly status of job openings across public and private industries in the United States. As the main gauge of labor market dynamism in this nation, it captures many interesting and important details about the health of U.S. businesses and consumers. In this article we’ll take a look at the various components of this report, and some important considerations that go into its creation.

The non-farm payrolls survey can be broken into two main sections of household data and establishment survey. The household data is acquired by conducting a statistical survey of households in the U.S., and extrapolating that information to account for the general status of the U.S. labor sector. The establishment data is obtained by surveying important public and private businesses across the nation. Of the two most important numbers included in this release, the unemployment rate is derived from the numbers of the household survey, while the net job losses or gains are calculated based on the responses of businesses. While these two pieces of information converge over time, due to methodological differences, at times significant differences are observable.

Of these two surveys, traders mostly concern themselves with the establishment survey, although the household survey also provides important information about the demographic breakdown of the employed population. Information about the age of new labor market entrants can provide important insight into how prosperous and financially secure U.S. families feel. On the other hand, since the establishment survey includes some very important data about the sectoral breakdown of job gains and losses, traders can use the release while trading stocks, commodities and bonds. A general tendency to lay workers off, for instance, could be a sign that a recession is peaking. Similarly, we would expect the retail sector to be the last to shake off the burden of a slump and hire workers in the aftermath of an ordinary recession. These and similar considerations can be very beneficial for trade decisions in all kinds of markets.

Now we’ll take a look at the components of the establishment survey.

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Sectoral Breakdown of the Payrolls Changes

The establishment survey is first broken down into the two major branches of private and public sectors. Traders generally prefer to exclude government hiring from their analyses — these firings do not always reflect economic realities, and can be distorted by political preferences. The private sector itself is divided into goods-producing and service providing sections, of which the services sector has so far been the most important, due to its large size in the economy.

Although we noted that government hiring may not be a significant indicator of economic health, jobs are jobs, and any person employed in the public sector is just as likely to spend his earnings if he feels comfortable about his future. This fact is especially important after recessions, as governments can be tempted to be more proactive in hiring in order to hasten a recovery.  

Weekly Hours

When employers don’t feel confident about the future, but don’t want to lose workers with experience and talent, they will choose to reduce weekly hours. This attitude can sometimes mask changes in the labor market in the period leading to a recession, as changes in weekly hours may not be reflected in lay-off numbers. When lay-offs are coupled to significant reductions in weekly hours, a significant deterioration in the health of the economy is the only interpretation. Conversely, as a recession ends and economic activity blossoms, employers may choose to readjust weekly hours before opening new positions, which can mask the extent of economic recovery.

Weekly and Monthly Income

At other times when the employer doesn’t seek to reduce weekly hours, and feels confident that in a harsh labor market laborers can be compelled to work for lower wages, he will choose to reduce wages before considering any other option. Wage reductions may be a sign that the contraction in the economy has reached its maximum momentum, as it is unlikely that employers will resort to this method for cost controlling at the start of a recession when the labor market is still active and heated.


All of the above information is equally valuable for analyzing the health of the economy. The non-farm payrolls release has important ramification for growth and the political stability of the U.S., and it is also exceptionally important for gauging the inflationary potential of the American economy. The immediate aftermath of this release is a period of chaotic, almost lunatic price action in the markets, but we hope to have made it clear in this article that the frenzied reaction is not altogether without logical foundations.

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