Dr. Econ

Why does the Federal Reserve consider nonfarm payroll employment to be an important economic indicator?

June 2004

The Federal Reserve and others carefully analyze trends in the nonfarm payroll employment series published by the Bureau of Labor Statistics (BLS). Over time, these data have proven to be an important indicator of economic conditions because they move closely in line with the overall economy and are published monthly on a timely basis. In addition, payroll jobs data are published for a large number of industries; this industrial detail helps the Fed to evaluate labor market and business conditions across a wide array of industries. Finally, monthly payroll jobs data by industry also are published on a timely basis for state and metropolitan areas, so economists can evaluate economic conditions for those regions and make comparisons with other geographic areas.

For these reasons, you will regularly find discussions of current trends in nonfarm payroll employment in publications from the Federal Reserve Bank of San Francisco:

Employment data
The BLS publishes two major monthly employment data series. Both are released on a very timely basis—about three weeks after the end of the month—making them among the first indicators released for each month. The Establishment or Payroll Data are estimated from a survey of about 400,000 business establishments that account for about one-third of all jobs in the country (it excludes agricultural sector jobs); the nonfarm payroll series is plotted as the heavy red line in Chart 1. These data are frequently used by economists to analyze labor market and economic conditions.

The Household Survey is generated from a survey of about 60,000 households; these data include farm jobs in their employment totals. The household survey is used to generate unemployment rate figures. The household survey results are published as the civilian employment figures shown as the thin blue line in Chart 1. As can be seen from Chart 1, the establishment and household survey job totals move very closely in line over time, but they are not identical.

The nonfarm payroll job series is revised annually and is smoother over time than the household survey; it also is considered to be the more accurate employment indicator. Most analysts believe that payroll jobs more closely reflects labor market conditions. For example, Federal Reserve Chairman Alan Greenspan observed in testimony before the U.S. House of Representatives on February 11, 2004:1

“I wish I could say the household survey were the more accurate. Everything we’ve looked at suggests that it’s the payroll data which are the series which you have to follow.”

For an excellent comparison of these two employment measures and their divergent behavior after the 2001 recession, please see “Two Measures of Employment: How Different Are They?” by FRBSF Economist Tao Wu in the August 27, 2004, FRBSF Economic Letter.

Payroll jobs move with the economy and help define business cycles
The nonfarm payroll employment series is one of the key economic statistics that the National Bureau of Economic Research (NBER) analyzes to determine whether the economy is expanding (expansion) or contracting (recession). Official business cycle dates—the peaks and troughs in the economy that define recessions and expansions—in the U.S. are determined by the NBER (see June 2003 Ask Dr. Econ). Expansions typically are periods of rising employment for both series (see the blue and red lines in Chart 1). Recessions—shown as the gray bars in chart 1—are periods of falling jobs.2

The Fed’s analysis of payroll job trends
In early 2004, Fed economists carefully monitored the nonfarm payroll employment series for signs of improvement in the labor market following the expansion in output in the second half of 2003. In the section titled “The Labor Market,” in the Monetary Policy Report submitted to Congress on February 11, 2004, Chairman Greenspan cited developments in the nonfarm payroll employment series. You may check out the most recent Monetary Policy Report to the Congress for recent employment trends and see how economists use the payroll employment data to evaluate the economy.

Information on payroll jobs for industries and regions too!
The establishment survey data on nonfarm payroll employment have another advantage over the household survey data on civilian employment; the payroll data also are reported by industry using the North American Industry Classification System (NAICS) to define industries.3 The industry detail allows Fed economists to research and analyze trends in specific industries, both nationally and in many cases by state and metropolitan areas. Availability of the payroll job numbers provides economists and analysts with a much richer understanding of labor market and industrial conditions across the nation. For example, after the major industrial recession experienced in 2001, analysts are interested in tracking the recovery in the manufacturing sector. Chart 2 compares the year-over-year changes nationally in the number of nonfarm payroll jobs for two key industrial sectors, manufacturing and service-producing industries. This chart shows the dramatic loss (when the change in jobs is below the zero line) of manufacturing jobs (in thousands) in recent years—represented by the heavy red line in Chart 2. The manufacturing sector was still losing jobs on a year-over-year basis in early 2004. In contrast, the service producing industries—shown as the thin blue line—began to add jobs in the fourth quarter of 2002.


Endnotes

1. Testimony of Chairman Alan Greenspan, Federal Reserve Board’s semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, February 11, 2004.

2. This close relationship between payroll jobs and the business cycle also is the reason why The Conference Board includes the nonfarm payroll employment series as one of four indicators that are used to make up its coincident economic indicators index—this composite series very closely tracks movements in the overall economy.

3. Major industrial classifications the Bureau of Labor Statistics uses under NAICS (first implemented in June 2003) include the following “Super sector” employment categories: natural resources and mining; construction; manufacturing; trade, transportation, and utilities; information services; financial activities; professional and business services; education and health services; leisure and hospitality services; other services; and government.

References

Bureau of Labor Statistics. See Employment & Unemployment.

“Definitions and Sources of Indicators Data.” New England Economic Indicators, Federal Reserve Bank of Boston, October 2003.

Federal Reserve Bank of New York. See Economic Indicators (By the Numbers): Nonfarm Payroll Employment.

Federal Reserve Bank of San Francisco. See Ask Dr. Econ, November 1999.

Monetary Policy Report to the Congress. (2004) Federal Reserve Board. February 11, 2004.

The Conference Board. See Economic Indicators: U.S. Leading Index.

“ Two Measures of Employment: How Different Are They?” (2004) Tao Wu, FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Number 2004-23, August 27, 2004.