The Importance of Employment Indicators for the Forex Market

Forex traders use two major employment statistics - the Employment Cost Index (ECI) and the Employment Situation Report (also known as Labor Report) - as long term currency predictors.

Those employment statistics (which include the unemployment rate, level of civilian employment, average weekly hours, hourly and weekly earnings, and labor productivity) indicate the strength of the labor market and measure the conditions of the economy of a country. Therefore they are of significant importance to multiple areas of the economy, including a country's currency trading price.

The Employment Situation Report

This employment statistics is made up from two surveys - the household survey and the establishment survey. The Employment Situation Report is an extremely broad release, which is why it is important to identify the most important for the fundamental analysis of the forex trading market numbers.

The household survey produces a figure indicating the total number of individuals without a job, and from that the unemployment rate. The unemployment rate is a countercyclical, lagging economic indicator. It is an important measure of joblessness and consequently a measure of the economy's growth rate. Being a lagged statistic though, means that it can measure the effect of an economic recession after one has already started.

Additionally, the unemployment rate is not the right measure of how many people have jobs since it excludes all sorts of people, such as those who voluntarily don't have a job and those who are so discouraged that they have given up looking for one. Because of such exclusions, a 10% unemployment rate does not mean that the rest 90% of the adult population is employed. The employment indicator that measures how many people are employed is the level of civilian employment. Unlike the unemployment rate, it is a procyclic, coincident economic indicator.

The average weekly hours report is a leading indicator. The data about the number of hours worked can reflect the position of the economy in the business cycle since companies tend to stretch the hours of their workforce before committing to hiring new workers for future growth.

The Employment Cost Index (ECI)

The Employment Cost Index is a lagging economic indicator and measures changes in employees' wages, benefits and bonuses. It is used by the Federal Reserve in order to set the monetary policy.

It is important to keep track of whether employees' earnings are keeping pace with inflation because if they fall behind, the purchasing power of consumers will drop.

Another employment statistics that is important to keep track of is the labor productivity. ECI is part of the data that is used to calculate productivity levels. The total productivity figures and the ECI are compared by serious investors who are aware that in order to keep end prices to consumers down, the productivity gains should not be less than the proportional ECI gains.

Importance to Forex Market Traders

The data from the employment reports is really affective in periods of economic transition - be it recovery or contraction, and therefore it is significant to foreign exchange participants. The reason for the importance of the employment indicators for the forex market is that they are considered as a gauge for the health of the economy and a measure of the degree of maturity of the business cycle of the particular country. If the unemployment figure is decreasing in value, then it is considered as an indicator for a cycle that is maturing. On the other hand, if the figure is increasing, the opposite is regarded.

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