What Happened to the NFP Rally?!

The September NFP report came and went, and boy, was it a doozy!

Economic forecasts were right on the money as they had correctly predicted an increase of 114,000 jobs in September. This was accompanied by upward revisions to July’s and August’s gains, which were upgraded from 141,000 to 181,000 and 96,000 to 142,000 respectively.

Meanwhile, the unemployment rate fell sharply in September, falling to 7.8% from 8.1% – its biggest monthly drop in over 18 months.

How in the world did that happen?

To understand the discrepancy between the job gains and the big drop in the unemployment rate, you must first understand how employment data is collected and analysed.

The U.S. conducts two separate surveys – one to determine the number of jobs added (a.k.a. the payroll survey), and the other to determine the unemployment rate (a.k.a. the household survey).

The payroll survey is conducted by interviewing large companies and government agencies to determine the number of individuals employed during the month. From the results of the survey, the government can compute how many jobs were created or lost.

On the other hand, the government conducts the household survey by sending out questionnaires to some 60,000 homes. The survey tries to find out how many of these people have work, how many are looking for work, and how many are not looking for work. From these figures, the government is able to determine the unemployment rate and participation rate.

The payroll and household surveys also differ in another major way. The household survey includes the self-employed, farm workers, and those who work for start-up companies, while the payroll survey doesn’t.

It’s important to note that while the Average Joe is more familiar with the unemployment rate, economists and investors tend to focus more on payroll figures to learn how quickly new jobs are being generated.

This is probably why we saw a reversal in the dollar’s price action last Friday. The dollar index had initially dropped from the 79.90 area to the 79.60 level in the first two hours of the NFP release. The Greenback then shot back up against its counterparts with USDX capping the day near its intraday high. What’s up with that?

USDX Reaction to September NFP

Aside from profit-taking, another possible explanation for the reversal is that analysts have taken a good look at the other details of the household and business surveys.

For instance, the U-6 unemployment rate, a broader measure of U.S. employment, remained steady at 14.7% in September. This stands in contrast to the drop in the official unemployment rate.

Also take note that the biggest increases in hiring are found in the health care, finance, transportation, and warehousing sectors. The manufacturing sector, which is one of the strongest in the economy, actually shed 16,000 jobs in September after printing a drop of 22,000 in August.

Analysts believe that the U.S. would have to generate 250,000 jobs each month for a few years for the jobless rate to return to its pre-recession levels. At this rate, it would take around 28 months for the economy to recover the jobs lost during the recession.

The scepticism around the latest jobs numbers suggests that analysts are still cautiously optimistic on the pace of the U.S. economic recovery. Right now, we need to wait for the next months’ numbers before we can make any realistic guess on the employment trends and their possible impact on the Fed’s QE3 program.

  • rayman

    Hehe, I made 68 pips on the NFP move :-)