COVID-19 pt. 2: NFP and UR
Tomorrow is the first Friday of the new month and as many of you know we expect to see the Non-farm Payrolls and Unemployment Report from the US. However, the situation now is a bit different and it is good for us to weight in the factors caused by the current humanitarian crisis that affects the world. But first, let’s go through the definitions of NFP and UR in a few lines in order for those of you that are not familiar with those economic parameters to better understand what their effect is on the overall economy.
Non-farm Payrolls — The non-farm payrolls are a summation of payroll jobs available within the non-farm payrolls classification as designated by the Bureau of Labor Statistics. This might sound a bit strange, but basically, non-farm payrolls include the new job openings in the private sector, excluding the hiring of farmworkers as well as some government workers, non-profit employees, proprietors and private households. But why the NFP report is so important? If we take a look at the classification by the BLS (Bureau of Labour Statistics) we can see that non-farm payrolls account for approximately 80% of US business sectors contributing to gross domestic product (GDP). And as you know GDP is the main measure when it comes to the state of the economy and a possible economic crisis. This means that if the NFPs are low it shows that the business sector is closing its’ doors and squeezing, which could only impact the GDP in a negative way.
Unemployment Rate — The UR for short is a metric showing the unemployed percentage of people in the overall economy. Higher unemployment rate affects negatively the overall economy due to a few reasons:
- The government has to spend more money from their resources for their social programs for unemployed people. Usually, all governments have a pool of funds that are in disposal for that purpose, but if the UR spikes a lot this pool can actually not be enough which would mean that the government will have to cut other budgets in order to increase the budget for social programs.
- A higher UR means that more people actually can not afford to make significant purchases or investments as they are trying to protect their savings until they find a new job. This means that the consumer spending will drop, probably also the housing market due to people not being able to apply for a mortgage and also probably investments will be pulled out of the market so the unemployed can actually have their money in order to cover vital spending needs. Speaking about mortgages a higher UR would also mean that a lot of mortgages could go into default, which strongly affects the banking sector and we all know what happened during the 2008–2009 financial crisis.
So now that you are familiar as what is the impact of NFP and UR on the economy, lets’ review the current situation.
Initial Jobless Claims:
In the past two weeks, we’ve seen the initial jobless claims rising significantly with 6.6 million new claims this week. This is not a great indication for the future of the economy, but there are a few things we need to consider. First of all, it is highly likely that the NFP and UR report will come out negative tomorrow, but a bit untrue. Currently, the government is preparing constant financial packages to help struggling businesses as well as unemployed people, and we can not really tell how much of those jobless claims are “real” so to say. What I mean is that a lot of businesses that have a decreased revenue flow due to the quarantine are sending their employees to the labour bureau, but at the same time keeping their spots for when the quarantine is over. That way the companies are benefiting from the financial aid package from the government and at the same time, the actual number of people that will remain unemployed is a lot less than the numbers we are seeing now with the jobless claims. We have to consider this factor because once the quarantine is over we might see a strong spike in productivity for the companies and a strong drop in the UR, which would have a positive impact on the economy.
However, for now, the situation remains dark and it seems that the financial aid from the government is not really making a dent into the issues that the Coronavirus is creating for the economy. If this situation continues for a prolonged period of time I expect to see a severe drop in the GDP and a possible economic crisis.
I expect to see a rise in the UR tomorrow which would be more than the expected reading as well as a strong drop in the NFP report, both affecting negatively the GDP and the overall economy. This will most likely cause a drop in the price of the USD, as well as probably a drop in the indexes and stock market at least for the short term until we see a ray of light in the situation with the virus outbreak.
There are a lot more things we can discuss on this topic, but I’ve tried to cover the expected impact of NFP and UR both in the short-term and also the possible outcome in the long-term as the Coronavirus outbreak is contained.
