After the US abandoned the gold standard the currency had a long cycle of decline and appreciation, the last couple of decades were no exception to this. Now let us compare how those trends conceded with Non-Farm payroll numbers. As we can see the US economy and labor market has gone through several stages:
- US economic boom during the second half of the 1990s, extending into 2000 and early 2001, accompanied by steady job creation.
- 2001-2002 recession, job losses reaching a peak by the end of 2001.
- Apparent recovery from 2003 to 2007, with reducing unemployment.
- The 2008 Great Recession extended well into 2010. Job losses much higher than any previous period on this chart.
- Recovery and consistent gains in job creation from late 2010 to early 2020.
NFP numbers before 2008
Let us take a closer look at the beginning. In 2000, the US was still in the economic boom, the second half of the 90s was accompanied by steady economic growth and prosperity in general. At the end of this decade, this trend continued. In 2000 in most months job gains fluctuated between 100,000 to 250,000 at one point even exceeding 400,000.
The market perception of the strength of the US economy has also benefited the US dollar. During 2000-2001 it has appreciated significantly, reaching record-high levels against its peers. From 1.10 at the end of 1999, the EUR/USD collapsed and the average rate during the next two years was near 0.90, mostly trading within 0.85 to 0.95 range. At one point the pair even collapsed to 0.83.
GBP/USD also fell, from 1.60 eventually settling near the 1.40 to 1.48 range. During those two years, the US dollar also steadily appreciated against the Japanese yen, rising from 102 to 131.
The situation has changed during the 2001 recession. As we can see from the chart above, the NFP indicator showed significant losses not only during that year but also in 2002 as well. Several times more than 200,000 jobs have been lost in a single month. From the autumn that year situations started to improve, but we can see negative NFP numbers for as late as in the middle of 2003. Therefore it was not until 2004 when it became clear that the US economy has recovered from the recession and employment gains became more sustainable.
2002 is also the year when the US dollar entered its long term bear market. The world's top reserve currency declined against its peers for three consecutive years, with EUR/USD trading at 1.35 and GBP/USD going above 1.80 and USD/JPY collapsing below 105.
As the US economic recovery took hold in 2005, there was a one-year reversal. For several months the country gained 200,000 or more jobs. During this period USD has appreciated by 12 to 15% against its three main rivals, mentioned above.
However, this recovery has proven to be short-lived, because from next year the dollar downtrend resumed. From 2007 negative NFP numbers returned to the picture, forcing the US Federal Reserve to cut rates dramatically, weakening USD even further.
By the end of the 2nd quarter of 2008, the American currency had reached record lows. EUR/USD traded well above 1.55 and GBP/USD reached the 2.00 level. Dollar depreciation was slightly less dramatic with Japanese Yen, with USD/JPY mostly trading within the 100 to 110 range.
Exception to the Rule
Surprisingly enough the actual number of monthly job losses stayed below 80,000 during the first half of 2008. However, it has rapidly accelerated after the bankruptcy of Lehman Brothers. The most unpleasant news came in March 2009, when NFP indicated a negative 663,000. This trend of job losses continued well into 2010.
Now logically, faced with a weak economy USD should have fallen even further. However, instead of declining from 2008 to 2012, the US dollar has gained 13% against the Euro and 30% against Pound. On the other hand, JPY kept appreciating, with USD/JPY falling to as low as 75 level.
This shows the exceptions to the basic rule. Under normal circumstances, when a particular crisis or recession was affecting mostly the US, then job losses led to a decline of the dollar. However, in 2008, when there was a global recession, many traders and investors fled to USD assets. Therefore in those economically challenging times, the dollar has benefited from the safe-haven status. So, considering those exceptions is important to understand what NFP is.
As we can see from the chart above, from 2011 until February 2020 Non-Farm Payroll numbers have shown steady job gains, frequently even exceeding 200,000. At the same time, the Eurozone struggled with the sovereign debt crisis for years and the UK had to face an economic backlash of Brexit decisions.
The results were predictable: if we look at any historical chart of EUR/USD since 2008, there is a great deal of volatility, but it is also clear that there is a long term downward trend. From an all-time high of 1.60, the pair fell below 1.10 and still struggle to overcome even that level. Some financial commentators are already openly discussing the possibility of Euro/Dollar parity, something not seen since 2002.
The dollar appreciation is even more dramatic with Pound, from 2.00 level GBP/USD eventually at one point fell below 1.20, currently still struggling to reach 1.25.
After 2012, as the Bank of Japan turned to more aggressive easing measures USD/JPY also had a reversal currently trading near 110 mark.
As we can see in the long term Non-Farm payroll numbers can be a useful measure of US economic strength and in many cases can help predict the direction of USD based pairs.
Can contracting Non-Farm Payrolls predict a recession?
Nowadays there are some obvious questions: how can we read the latest NFP Forex News?
After 9 years of constant expansion, for March 2020 the consensus of the forecasts for NFP report was at -100,000. Obviously such a large amount of job loss could have been bad news, but considering the spread of COVID-19 and the damage it has done to the world economy, this was what the market was expecting.
The actual number was much worse, showing a net job loss of 701,000. This can be problematic for the US economy and USD for five reasons:
- Even during the time of the Great Recession the largest monthly job loss recorded was 663.000 in March 2009. NFP at -701,000 in a single month was not seen for at least the last three decades.
- Looking at the examples during the beginning of 2001 and 2008 recessions, the number of job losses increased gradually, first starting under 100,000 and expanded steadily. NFP jumping from positive numbers to -701,000 in a one month period is very different from two previous recessions.
- There were several cases of ‘standalone’ negative NFP numbers. For example, there were some cases in 2000 and 2017, when in one particular month some jobs were lost on net bases, but afterward steady gains in employment resumed. However, it might be worthwhile to note that those ‘standalone’ numbers were rather small. In 2017 it was just -33,000, nowhere near to current -701,000.
- The consumption component of Gross Domestic Product in the case of the US is quite large. In fact, the latest reports show that it makes up to 70% of the entire GDP. This component tracks household spending. Most people when they become unemployed start cutting back in a bit to boost their savings. Therefore, 701,000 job losses in a single month can have a major impact on GDP and eventually could lead the US economy to recession.
- The US government and the Federal Reserve might have less flexibility to address the upcoming economic downturn. For example, before the 2001 recession, Fed Funds Rate was well above 5% and the US had a budget surplus of $236 billion. So there was plenty of ground to cut rates and raise government spending. Nowadays, with rates already at near-zero levels and with a $1 trillion deficit, it might be more difficult to properly address the recession.
Obviously, it is difficult to predict the outcome of recession with only one NFP report. There are many other indicators of the overall health of the economy, such as Gross Domestic Product
, Unemployment rate, and inflation. However, as we have seen before the Non-Farm payroll numbers can often serve as an early warning sign of the upcoming economic boom or recession.