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Economic Calendar U.S. Unemployment Rate – An Overview For Forex Traders

Source of report: Bureau of Labor Statistics, U.S. Department of Labor

Release URL: http://www.bls.gov/news.release/empsit.nr0.htm

Release Frequency: Monthly, on the first Friday after the reporting month ends.

Timing: Lagging indicator.

Volatility: Close to none

 

Indicator Overview:

The unemployment rate is the number of unemployed workers divided by the total labor force. It is expressed as a percentage, and is calculated as follows:

Unemployment Rate = Number of Unemployed / Total Labor Force * 100

It rises during cyclical downturns and falls during periods of rapid economic growth, but is considered to be a lagging indicator because the rate peaks after the trough of the business cycle, and bottoms after the peak is formed.

On the first Friday of each month at 8:30 AM EST, the U.S. Department of Labor’s Bureau of Labor Statistics announces the total number of employed and unemployed persons in the country for the previous month. These figures, particularly the non-farm payrolls and the unemployment rate, receive wide coverage in the media. The Bureau of Labor Statistics uses two different surveys,conducted by the United States Census Bureau and the Bureau of Labor Statistics, that gather employment statistics monthly, to measure employment and unemployment (of those over 15 years of age). The Bureau also calculates six alternate measures of unemployment:

  • U1:Percentage of the total labor force unemployed for a period of 15 weeks or longer.
  • U2: Percentage of labor force who lost their jobs or completed temporary work.
  • U3: It denotes the official unemployment rate as per the International Labour Organization definition.
  • U4: Includes U3 + workers who are no longer looking for work because of the current economic situation.
  • U5: U4 + the number of workers who are able to work, but are not actively looking for a job.
  • U6: U5 + the number of part-time workers who are willing to work full-time, but cannot due to the prevalent economic conditions.

Importantly, some level of unemployment will always exist in an economy as technological advances occur, and as industries expand and contract. This is why most economists agree that there is a natural rate of unemployment in every economy. This natural rate is most affected by public policies like high minimum wage and generous unemployment benefits that discourage job creation.

Importance:

The unemployment rate is an important statistic used by the U.S. government to gauge the health of the economy. If the unemployment rate creeps too high, the government will try to stimulate the economy by creating fresh jobs. The Federal Reserve will initially step in with expansionary monetary policy through lowering the Federal funds rate. If this fails to work, then the Federal government will use fiscal policy measures. It can also directly create jobs by hiring people for public works projects. Employment can also be indirectly created by stimulating demand with extended unemployment benefits.

Policy makers use current unemployment statistics to look at which sectors are losing jobs faster. It is however important to note that the unemployment rate should be compared on a year-over-year basis to offset the effects of seasonality. Month-on-month comparisons may not indicate the real ongoing trend.

How it impacts the U.S. Dollar:

Lower than expected unemployment rate leads to more income earning workers and an increase in consumption expenditure that may fuel inflationary pressures, causing interest rates to rise. High levels of unemployment results in lower incomes, decreased consumption and a drop in economic activity. Thus, a drop in the unemployment rate is generally considered to be positive (or bullish) for the USD, while a rising figure is seen as negative (or bearish) for the currency.

Unemployment rates below the “natural rate of unemployment” cannot be sustained for too long. They would eventually cause higher inflation and force the Federal Reserve to increase the Federal funds rate in order to moderate growth and prevent an up tick in inflation. Traditionally, the “natural rate of unemployment” has been estimated to be at 5.5%.

Historical Preview of the US Unemployment Rate:


Source: tradingeconomics.com