Economic calendar - the labour market tells a lot about the economy

Labour market news regarding new jobs or unemployment is one of the most important factors influencing events in the financial markets. According to some economists, the labour market provides a much better picture of the state of the economy than, for example, the much more popular GDP.

Labour market reports are among the most closely watched data that appear regularly on the economic calendar. It is one of the indicators of the state of the economy on which central banks base their monetary policy decisions.

GDP has long been considered an indicator of the health and performance of the economy. In recent years, inflation has been considered one of the main factors influencing central banks' interest rate decisions. However, in the second half of 2024, it is clearly evident that central bankers, and especially those in the US, give the most weight to labour market reports when making monetary policy decisions.

Labour market more important than inflation

At a time when inflation is approaching the central bankers' target of around 2% per annum, the situation on the labour market and the level of unemployment is precisely the factor that can have a direct impact on decisions on the next possible move in interest rates. The head of the US Fed himself mentioned in early October 2024 that the labour market provides a better picture of the state of the economy than GDP (hence the mention of GDP at the beginning of the article), and Minneapolis Fed chief Neel Kashkari, for his part, sees increased unemployment as a greater risk to the economy than increased inflation.

In the past, it was generally thought that good labour market numbers indicated a booming economy, leading to possible wage growth (and thus possible inflation) and speculation about possible interest rate hikes by central banks. This in turn attracts investors and traders who find the currency of a given country more attractive and its value may rise. Nowadays, however, falling unemployment may no longer lead to rising wages, as employers can save on wages thanks to modern technology, etc. Estimating inflation through the labour market situation is thus more complex and puts the labour market at the forefront of central bankers' monetary policy decisions.

What to watch out for

There is quite a lot of labour market data in the economic calendar, with different countries publishing differently detailed reports on the total number or change in the number of employed and unemployed people, the size of incomes, participation rates, etc. Of course, we get the most extensive dose of data from the USA, but traders are also interested in the labour market situation in Europe, the UK, Japan, etc.

The vast majority of this is official data and only rarely do we look at data and surveys from private companies. In most countries, labour market data is published on a monthly basis but, for example, EU data is published on a quarterly basis and in the UK, although data is published once a month, it is an average of the last three months.

NFP, unemployment and more

Probably the most closely watched data on the economic calendar by traders is change in nonfarm employment, commonly referred to as Nonfarm Payrolls, which we wrote about in detail in the first part of our series on economic calendar events.

Along with the NFP, the Employment Report, published by the Bureau of Labor Statistics (BLS), tracks the unemployment rate. This measures the percentage of people in the total labour force (total employed + unemployed) who were actively looking for work in the previous month. In addition, the labour force participation rate, which measures the percentage of people of working age who are working or looking for work, is also tracked, and a fairly important figure is the average hourly wage, which tracks the change in the amount workers earn per hour working outside the agricultural sector.

Then, in the same week, the Nonfarm Employment Report is released by Automatic Data Processing, Inc., a private company that processes payroll for about one-fifth of all privately employed persons in the US. Published two days before the government data, it is based on actual payroll data for about 25 million workers and is a good predictor of the government's nonfarm payroll report.

Then, before the ADP report, data from the Job Openings and Labor Turnover Survey (JOLTS), also published by the Bureau of Labor Statistics, is released.  This survey collects data from employers on employment, job openings, hiring, and firings. JOLTS then defines job openings as all jobs that are open on the last working day of the month.

On a weekly basis, the US also releases a weekly report on the number of unemployed people registered with the unemployment offices receiving unemployment benefits. There is a one-week lag in the release of Initial Jobless Claims data, as well as Continuing Jobless Claims data, for the week preceding the new claims statistics.

As is the case with other important data on the economic calendar, traders should pay attention to the latest labour market news and be cautious about opening new positions. Currency markets may experience increased volatility and widening spreads in the immediate aftermath of the announcement, which could negatively impact trading accounts. This occurs especially at times when the data released is very different from analysts' expectations.