US Unemployment Rate

Trading Basics

US Unemployment Rate

Brief Summary

The Unemployment Rate released by the US Department of Labor is reported as a percentage worked out by dividing the number of unemployed workers by the total civilian labour force in America. The figure is released at 8.30 am eastern standard time, 1.30pm GMT, on the first trading Friday of the month.

Usually, a higher rate is seen in recessionary economies, while on the contrary, a growing economy sees its unemployment rate decreasing. Therefore, a decrease of the figure is seen as positive for the US economy, while an increase is seen as negative.

Full Overview

There’s no economic report that is as comprehensive and as widely-followed by traders and investors as the monthly US labour market report released by the Bureau of Labor Statistics.

It’s the first report of the month that provides a detailed insight into the present and future economic conditions from a household and business perspective.

In the following lines, we’ll dig deeper into the actual labour market report and its top headliners (unemployment rates, non-farm payrolls, and average hourly earnings) and show you how to trade the report with two effective trading strategies.

US Labour Market Reports Explained

One of the most important macroeconomic reports followed by traders and investors around the world is the US labour market report. The report was created in the 1930s during the Great Depression as a measure of labour market activity in the United States.

The labour market report is prepared and published by the Bureau of Labor Statistics (BLS) on the first Friday of every month at 8:30 am EST, making this day especially important for day traders and longer-term traders alike.

At the release time, volatility often picks up across different financial markets. Depending on the actual employment numbers, stock markets may open with significant upside or downside gaps, the US dollar has a tendency to move hundreds of pips against other major currencies, and commodities often move violently following the release.

Why do Markets Care?

The current situation in the US labour market is important because it reveals how large corporations, small companies, and people in charge of making hiring decisions perceive the current economic conditions. Firms won’t add new workers if they believe future demand will be slowing down. Similarly, they won’t dismiss workers if the economic situation looks bright and they anticipate future demand for their products.

From a household perspective, nothing erodes consumer sentiment more like the loss of a job

From a household perspective, nothing erodes consumer sentiment more like the loss of a job. Since consumer spending accounts for roughly 70% of economic activity in a developed economy, it’s no wonder that investors and traders follow the US labour market report closely to get a clearer picture of future consumer spending and economic activity.

There are two separate surveys in the monthly US labour market report. The first is the Current Population Survey (CPS), also known as the household survey, and the second is the Current Employment Statistics (CES), also known as the payrolls survey.

The first survey (CPS) is presented in the “A” tables located in the first half of the report, while the second survey (CES) is found in the “B” tables. That’s why those surveys are often simply called “A” and “B” tables. The “B” tables tend to be slightly more important for traders and investors than the “A” tables.

While the US labour market report is an unusually large and complicated report to digest, markets often pay attention to three headliners:

  • The unemployment rate
  • Changes in non-farm payrolls (NFP), and
  • Changes in average hourly earnings

Besides these headlines, other important figures from the report include overtime hours worked, total hours worked, and the change in manufacturing jobs, to name a few.

Still, no number generates more volatility in the markets than the change in non-farm payrolls. In general, a higher number of non-farm payrolls is good for the equity market and the US dollar, while the opposite is true when the number comes in below market expectations.

Unemployment and the Business Cycle

The situation in the US labour market has a strong relationship with virtually every other economic indicator. The change in non-farm payrolls is closely linked to the business cycle: When payrolls rise, economic activity and consumer spending usually rise as well.

This is an important consideration for traders as the GDP report is released quarterly and the labour market report monthly, which means that important conclusions can be made about future economic conditions by reading the labour report.

Since 1960, there hasn’t been a single economic recession that hasn’t been preceded by the three consecutive monthly falls in the non-farm payroll numbers. On the other hand, the unemployment rate has been a lagging indicator in times of economic recoveries. Unemployment rates tend to rise for a few months even after the economic activity has started to pick up again.

Where Does the Data Come From?

The US labour market report excludes persons over the age of sixteen, members of armed forces, and people in mental or penal institutions.

According to the Bureau of Labor Statistics, people qualify as employed if they have worked as paid employees in either a company or their own business, on their farms, or have done more than 15 hours of unpaid labour in their family’s enterprise. As employed persons are also considered those who have taken temporary leave, paid or unpaid.

Persons are included in the unemployed category if they’re not working during the period covered by the labour market report. If they voluntarily terminated their job, they’re classified as job leavers. Laid off workers are put into the job losers category.

The labor force participation rate refers to the percentage of the employable population that is in the labor force, while the employment population ratio refers to the percentage of employed persons in the total population.

Current Population Survey (CPS)

The Current Population Survey, or “A tables”, or “Household Survey”, is a comprehensive survey of about 60,000 households that contains questions about the current employment conditions. The survey is conducted during the week that contains the nineteenth day of the month (also known as the survey week) and addresses conditions during the previous week that contains the twelfth of the month.

The results of the survey are presented in 13 detailed tables in the first half of the US labour market report.

Current Employment Statistics (CES)

The Current Employment Statistics (CES), also known as the payrolls survey or “B tables” is a large survey that includes around 160,000 businesses with some 400,000 individual worksites. Similar to the “A tables”, this survey is based on employment conditions during the reference week that contains the twelfth day of the month.

Results of the CES survey are presented in seven tables in the second part of the US labour market report.

How to Trade the US Labour Report?

Traders and other market participants closely follow the US labour market report on the first Friday of every month.

When the main headlines hit the newswire at 8:30 am EST (US unemployment rate, non-farm payrolls, and average hourly earnings), extreme volatility enters the markets. This is especially true if the actual number comes in well above or below market expectations. Here, we’ll cover two main strategies used by traders to trade the US labour market report.

Trading in the direction of the miss

When the employment statistics get released, traders focus on two key numbers: The actual number and the market forecast. For market volatility, it doesn’t really matter whether this month’s number is above or below the previous month’s number; what matters is whether the actual number is above or below market expectations.

Nowadays, algos are much faster than human traders and push the price up or down in microseconds

Trading in the direction of the miss means taking a long position if the actual number comes in better than expected and taking a short position if the number comes in weaker than expected. For the unemployment rate, if the actual number comes in above expectations this is usually a bad sign for the markets and the US dollar, i.e. there are more unemployed people than the month before. For the non-farm payrolls and average hourly earnings, an actual number that is above expectations is considered good.

In the good old days when trading was still a human playground without algos, traders could make their month by simply comparing the actual numbers with the market forecasts and immediately entering the market in the direction of the miss. Nowadays, algos are much faster than human traders and push the price up or down in microseconds after the release time, leaving human traders without many trading opportunities in news trading.

However, if the difference between the actual number and the market forecast is exceptionally large, human traders can still enter in the direction of the miss. Algos also have risk ceilings, and the market tends to move persistently in one direction for quite some time if the actual release catches the market by surprise. As a rule of thumb, any miss above two standard deviations can be considered a significant miss.

Fading the move

The second strategy is called “fading the move” and refers to taking a counter position of the initial market reaction. This makes sense when headline numbers come in exceptionally strong or weak, unleashing a wave of buying or selling pressure by the algos. However, if other key parts of the employment report reveal a fundamentally different picture than what the initial market reaction was, traders can fade the move and take a contrarian view.

Fading the move can sound like a dangerous strategy at first. Why should a trader catch a falling knife and enter in the opposite direction of an extremely strong sell-off? It takes some trading experience to identify what moves are worth fading and what is the perfect time to enter into the opposite direction.

In general, traders should switch to the 5-min charts and wait for the price to form two consecutive candles in the opposite direction of the initial market reaction. For example, you could wait for two consecutive 5-min bullish candles in a strong sell-off or two consecutive 5-min bearish candles if the initial market reaction was extreme buying.

Place your stop-loss just above/below the recent swing high/low and aim for a profit target where the market has traded immediately before the labour market report.

Final Words

The US labour market report is a key economic indicator that provides a timely overview of the household and business perspectives on current and future employment conditions.

It’s the first major economic indicator of the month with strong connections to the business cycle, consumer spending, retail sales, economic activity, and inflation.

The report is based on comprehensive surveys that cover around 60,000 households and 160,000 businesses with questions about the employment conditions in the week that contains the twelfth day of the month. The household perspective is provided in the first half of the report (“A” tables), while the business section is presented in the second half of the report (“B” tables).

While the report includes several headliners, traders usually follow changes in unemployment rates, changes in non-farm payrolls, and average hourly earnings.

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