US Nonfarm Payrolls: What’s Considered a Big Miss?

Aug 10, 2023

Many years ago, a stock broker told me, “When the US market sneezes, the world catches a cold.”

That still rings true today. If you trade anything at all, chances are you’ll have to pay attention to the US economic reports, and few can trump the “mother of all reports”—the nonfarm payrolls.

What are the Nonfarm Payrolls?

Here’s the definition right from the horse’s mouth, the Bureau of Labor Statistics:

“Each month the BLS surveys about 145,000 businesses and government agencies, representing approximately 557,000 individual worksites, in order to provide detailed industry level data on employment and the hours and earnings of employees on nonfarm payrolls.”

In layman terms, NFP is the change in the number of employed people during the previous month, excluding the farming industry. It is usually released on the first Friday of each month, together with the average hourly earnings and the unemployment rate. Of the three, the NFP usually receives the most attention.

Why Do Nonfarm Payrolls Matter?

Job creation is a leading indicator of consumer spending and inflation, which the Feds pay attention to when determining monetary policy.

The Feds have the dual mandate of maximizing employment and keeping inflation at a low and stable value of 2% per year.

A strong NFP value therefore drives the Feds toward a more hawkish stance and the expectation of a rate hike is bullish for the USD.

3 Years of NFPs

To determine how accurate the forecasts have been, I pulled up the NFP releases over the past 3 years.

The numbers are in thousands of jobs. Here’s a graphical representation:

Of course, nobody expects forecasts to be perfect, but some of the misses have been spectacular.

One possible explanation for this is that economists prefer to err on the side of caution when formulating their forecasts. If an economist forecasts an outlier value, but turns out to be wrong, it makes him look really bad. On the other hand, if his forecast is in line with his peers’, nobody really takes notice even if the entire bunch is wrong. Most forecasts therefore tend to cluster around the mean, giving opportunities for big misses.

For the 3-year period above, the magnitude of the average miss was 158000, and the standard deviation of misses was 157000.

With this information, you can get a feel for whether any given NFP release is a major surprise to the market. Let’s look at a couple of recent examples.

Reacting to NFP Misses

When analyzing your chart, it’s important to remember that market expectations are already priced in. The chart shows an equilibrium price containing all known information to that point, including the forecasts which would have flooded the internet.

When the number is released, prices will absorb that new information and move to a new equilibrium. The magnitude of the move should be commensurate with the magnitude of the miss, at least in theory.

Here’s an example of a small and big miss:

This is the Feb 2023 NFP release, which came in at +517K instead of the forecast +193K. This +324K miss is over the average plus 1 standard deviation miss, fueling an immediate USDJPY rally.

On the other hand, here’s a relatively quiet NFP release in May 2022. The +38K miss is well within historical norms and the USDJPY had little reaction.

Don’t forget noise is a constant factor in the markets, as well as other factors that can move prices (such as JPY fundamentals in the example above). So I don’t suggest solely using NFP results to guide your trading decisions.

Regardless, the ability to identify a small/big miss could swing the odds in your favor.

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