Trading the Monthly Nonfarm Payrolls Number
The term "nonfarm payrolls" refers to the total number of workers in the United States—excluding farm workers and workers from a handful of other job classifications—and is compiled monthly by the Bureau of Labor Statistics (BLS). Here is how to trade the release.
Historical data shows that the most significant corrections in U.S. equity markets tend to coincide with severe economic contractions.
That’s clearly illustrated by the fact that the three biggest corrections in the stock market during the 21st century have played out in parallel with the three most significant economic recessions over that same period—2001-2002, 2008-2009 and 2020.
And one of the biggest complications stemming from a serious economic contraction is of course the loss of jobs in the economy.
Taking all of that into consideration, one might reasonably wonder about the current state of the workforce in the United States.
As most are aware, the onset of the global COVID-19 pandemic in 2020 threw a major wrench into the world economy, and catalyzed the first major recession in the U.S. since the Great Recession. As a result of global lockdowns and reduced economic activity, the workforce in the U.S. shrunk rapidly.
To wit, total “nonfarm payrolls” in the U.S. dropped from roughly 152 million in February of 2020, all the way down to 130 million in April of 2020. One of the most rapid declines on record.
The term “nonfarm payrolls” refers to the total number of workers in the U.S.—excluding farm workers and workers from a handful of other job classifications.
The total nonfarm payroll figure is compiled by the Bureau of Labor Statistics (BLS) via surveys of private and government employers. Changes in nonfarm payrolls are announced on a monthly basis—a report that’s closely followed by Wall Street.
Investors and traders are sensitive to changes in the U.S. employment situation due to this metric’s close relationship with the underlying economy. Importantly, this figure can also impact ongoing economic policy in the country.
For example, when total nonfarm payrolls drop suddenly—as they did in 2020—central bankers typically institute accommodative monetary policies in an attempt to head-off protracted downturns in the economy.
Back in 2020, the U.S. Federal Reserve dropped benchmark interest rates to zero for that exact reason. Not coincidentally, the Fed recently initiated the process of raising benchmark interest rates, as fundamentals in the underlying economy have strengthened.
As stated previously, total nonfarm payrolls in the United States were roughly 152 million in February of 2020, and dropped to 130 million in April of 2020.
As of today, that figure has now increased to above 150 million, suggesting that the workforce in the United States has recaptured almost all the job losses incurred during 2020-2021.
And at the end of March, the Bureau of Labor Statistics announced that total nonfarm payrolls had increased by another 431,000 from March 1 to March 31, with notable gains in the leisure and hospitality, professional and business services, and manufacturing sectors.
The tweet below from Elise Gould highlights which sectors of the workforce have experienced the biggest gains and losses during the last couple years.
Strength in other key employment metrics further underscores the trend illustrated by nonfarm payrolls.
For example, the unemployment rate represents the number of unemployed people as a percentage of the total labor force (the total labor force is the sum of the employed and unemployed). It therefore represents the percentage of the labor force that isn’t employed—those people that want a job but don’t have one.
Prior to the pandemic, the unemployment rate in the U.S. was very healthy, clocking in at 3.5%. But that metric skyrocketed to nearly 15% during the first half of 2020. Believed to be the highest reading in the number since the Great Depression.
At the end of March, the Bureau of Labor Statistics announced that the unemployment rate currently stands at about 3.6%—just a hair above the 3.5% observed immediately prior to the pandemic.
But in their latest report, the BLS also indicated there are currently an estimated six million unemployed workers in the U.S.
Coupling that with the fact that there are about one million less jobs in the current economy, as compared to before the pandemic, seems to suggest that the employment situation in the U.S. isn’t quite as rosy as the high-level statistics might indicate.
Fewer jobs could ultimately translate to slower growth in gross domestic product (GDP), and potentially impact the economy in other unforeseen ways.
Going forward, that means the monthly nonfarm payrolls report could become even more important to the financial markets. And any large negative surprises (i.e. big job losses) in the monthly report could therefore potentially trigger another significant bout of volatility in the financial markets.
With concerns already growing over the possibility of another recession, investors and traders may want to keep an eye on upcoming nonfarm payrolls reports.
For more background on nonfarm payrolls, readers can review this installment of The Leap From Options to Futures on the tastytrade financial network. To learn more about how future nonfarm payroll reports could impact the Fed’s ability to raise rates, this episode of Splash Into Futures is also recommended.
As always, updates on everything moving the markets are available via TASTYTRADE LIVE, weekdays from 7 a.m. to 4 p.m. CT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.
