What Are Non-Farm Payrolls?
How many times over the past 6 months have we said, “…and the key event of the week is the Non-Farm Payrolls in the US,”?

There’s no other economic number like it; this is the Superbowl, Stars & Stripes and American Pie all rolled into one. Once a month traders around the world get their collective knickers in a twist over this high profile coin toss.

So why’s there always so much fuss about this number, why’s it got such a silly name and how reliable is it? Grab a large coffee and read on.

Why The Fuss?
The jobs data is viewed as the single most important report because it’s pretty up to date and provides a broad look at the health of the economy. The creation of jobs is the backbone of the American Dream, leading to more wealth, consumer spending and larger houses. Alternatively, when jobs start to disappear, the reverse happens and the whole economy goes tits up.

What are the main numbers?
The Non-Farm Payroll is the headline number, but there are several secondary ‘bolt-on’ numbers, and one other key piece of data, the Unemployment Rate.

And here’s the best bit, the two most important numbers come from different sources, so they often contradict each other. One I remember well was February last year. There was a big drop in the number of jobs. Yet the unemployment rate also fell, suggesting that more people had found jobs. Very simple maths suggests that we have a problem, Houston.

This year, of course, things are a little simpler – everything seems to be going down these days. Lets have a closer look:

Non-Farm Payroll
What a ridiculous name! Only the Americans could come up with a name like that, rather than simply call them employment numbers. So, what does it say on the tin?

Also known as the ‘Establishment Survey’ this is a measure of jobs, not employees. So, Mario the migrant, living the American Dream by working in 4 different jobs would count as 4, not 1. Businesses with at least 1000 workers are included in the survey. Smaller firms are looked at on a random basis and new firms aren’t included immediately. The survey covers around 400,000 establishments (work places).

As hinted at in the name, the survey doesn’t cover agricultural jobs. Less obvious though, it also excludes jobs in the military. So perhaps it should be called the Non-Farm And Tanks Payrolls. But hold on Harry, the survey also knocks out proprietors (bosses to you and me), non-salaried workers, and self-employed and domestic workers.

Go On, Have A Guess
This is the number one, key piece of economic data (not to mention the one most likely to mess up a Friday lunch date). And yet, like so much economic data that we hang our hats, and trades, on, it is only a sample. This monthly number isn’t a census; it’s based on a survey that captures around one third of the total non-farm jobs. Or put another way, it guesses two-thirds of the jobs.

And There’s More
Because of the delays in responding to the survey (known technically as ‘Couldn’t Give A Monkey’s Syndrome’) the initial release only accounts for around 65% of the survey total. So the key monthly release is actually only 65% of one third of the survey.

Hey, this is important. A lot of investors know this is a big number but don’t really understand it. Each month traders bet their shirts following release of the headline figure. But before trading check out the revisions. The following month’s revision brings the coverage up to 85% and a further 5% sneaks in after 2 months. Trust me, sometimes the revised figures make a big, big difference.

Unemployment Rate
For consistency (NOT!) the unemployment rate is taken from a completely different source. This key rate is based on a survey of 60,000 households ‘scientifically selected to be representative of the US population’. So presumably 50% have had plastic surgery on every part of their anatomy and the other 50% look like Johnny Vegas’ big-boned relations. This sample is then digitally enhanced using an estimate for the national population.

So the monthly unemployment rate on a workforce of around 138 million is determined by a survey of 60,000 households bored enough to pick up the phone.

This survey also excludes the military, but includes farm workers and self-employed; this creates 7-8 million more workers than the payroll data. Another difference is that this survey counts people, not jobs, so Mario the migrant with his four jobs would only count as one.

The only revision to the household survey is an annual adjustment. Because the figure is based on guessing the size of the population it’s subject to some large errors; these are revised each January.

‘B’ List Celebrity Numbers
There’s a few other numbers released at the same time as the Payrolls, but they usually remain hidden in the shadows. The Weekly Hours Worked and Average Earnings numbers come from the Non-Farms survey and rarely create a stir. The Manufacturing Payrolls number comes from the same stable, but no one really gives a rat’s arse about it unless the figure is shockingly different from every other month. Oh, and there’s loads of minor numbers, analysing the change in hot-dog sellers in Detroit etc, but you need a security pass and a brain the size of Belgium to care about those.

What Other Measures
If there’s one thing the Americans are obsessed about (apart from their looks, hummers and Big Macs) it’s the number of people working. There’s a whole salad cart of extra data on the jobs front so here’s a quick Michelin Guide to some other silly names you might come across:

ADP National Employment Report
This one suddenly became the ‘must have’ accessory in early 2007, when its data bore an uncanny resemblance to the Non-Farm numbers. The ADP is a monthly number and is released on the Wednesday, 2 days before the Non-Farm number.

ADP is an enormous business outsourcing and payrolls company that takes its clients’ payrolls data and applies it to a similar methodology to the Non-Farms survey. The ADP also samples 400,000 establishments but because the data is collected electronically each week there’s no need for revisions due to late submissions. One big difference is that it excludes public sector workers.

ADP’s recent track record of predicting the Non-Farm numbers has been well wide of the mark. Revisions to the Payrolls data might prove the ADP numbers to have been more accurate in the first place, but that’s no use to traders with the time horizon of an Amy Whinehouse re-hab visit.

Weekly Jobless (Initial Claims)
Hey, finally a real figure, not an estimate. This figure shows the total number of people making an initial claim for state unemployment insurance benefit. But a couple of pointers: firstly this figure includes claims that might not be successful. Secondly, it doesn’t reflect the full unemployment picture, as not everyone claims state benefits.

Released at the same time is the figure for Continuing Claims; this is the total number claiming in that one week.

Challenger Layoffs
This measures the total number of corporate layoffs publicly announced during the month and compares them to the same month a year earlier.

Help Wanted Index
This slightly dated index of help-wanted adverts in newspapers is compiled by the Conference Board. The index compares the number of job adverts with the same period a year earlier, but has lost its appeal due to the number of firms using alternative means of recruitment. Job agencies and the Internet spring to mind.

Manpower Employment Outlook
Another dying breed. This is a quarterly survey that asks 16,000 employers how they expect total employment to change in the next quarter compared to the previous one.

Hey, if you’re getting a taste for all these weird names, or fancy looking into the numbers more, here’s a great web-site, courtesy of Mr Obama.

Dates For Your Diary
Payrolls -typically the first Friday after the month it’s reporting on.
ADP- Wednesday of the same week as Payrolls number.
Weekly Jobless- every Thursday
Challenger Layoffs- second or third business day after the month it’s reporting on.
Help Wanted Index- last Thursday of the month following the month it’s reporting on.

Life’s Different Over Here
In Europe and the UK we don’t have anything to rival the importance of Non-Farm Payrolls Day each month, except possibly TV’s “Dancing On Ice”. Of course we have employment numbers, and data on average earnings, but they usually elicit the same response as watching Chelsea play.

In Europe and the UK our ‘key economic indicator’ is more of a ‘flavour of the month’. Our obsessions move from M3 fever (that’s money supply not road rage), to balance of payment deficits, to inflation. At the moment, we’re more interested in GDP and retail sales figures, as we squint to spot any slowdown in the rate of deterioration, or “green shoots”. Closely linked to this are figures from consumer and manufacturer surveys showing how the economic climate has affected confidence ,and whether consumers are still willing to spend.

The clock’s ticking; I can feel the excitement mounting. Payrolls are nearly upon us. Hopefully now you’ll be clued in on what to look for.