Contextualizing the NFP Data

The U.S. Employment Situation report aka Non-Farm Payrolls may be one of the most misunderstood, over-traded datapoint that exists.  I want to contextualize today’s jobs numbers for readers in a way that helps you to understand what it does — and doesn’t — actually mean.

Please bear with me as I over-simplify this for illustration purposes.

To begin with, you need to understand the size and scope on the Labor market, and what is actually being modeled. There are about 140 million Americans working full time in the country today. Another 15 million or so would like full time jobs, but don’t have one. They may be working part time or not at all.

What the monthly Employment Situation report measures — in near real time — is the net changes in that number. Take the total net number of new hires, subtract the job losses, and you get the marginal change in Employment.

Since our starting number is so big (140m+), and the monthly net changes are so small (200k), the overall change is a statistically small number. Typically, the net change is between one tenth (140k) and one quarter (350k). During the height of the 2008-09 crisis, the net change was approximately half a percent (700k).

The model that produces the monthly number is part measurement (Establishment surveys), part extrapolation (Birth Death adjustment). This is then revised, as more and better data comes in later. The model gets re-benchmarked, seasonality is adjusted for, and one-off weather or other events impact (and that impact then attenuates away) the overall NFP series.

Thus, any single 0.1% data point needs to be recognized for what it is. One data point in a longer series. This is why I continually have emphasized the importance of longer term employment trends rather than obsess over any given month.

While employment reacts to the broader economy — this is why it typically lags the economic cycle — it does contain forward looking components. This is why we always track Hours worked, Income, and Temp help. These three components tend to lead the economic cycle.

Hence, there is lots of good and valuable information contained in the monthly NFP release — its just not what most people think it is.


This month, consensus estimates are for 190,000 net job gains. In a normal economic cycle, this would be considered a soft number, barely greater than the 150k need to stay ahead of population growth. However, in a post credit crisis economy, where GDP remains middling and job creation is not robust, this is considered a decent number. To really move the needle on Unemployment, 300-400k per month (or better) is what is required . . .

BLS data released at 8:30am EST

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