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The US is the world’s largest economy, and the country also has the world’s largest stock market. Given the importance of the health of the US economy to its companies, it’s no surprise that certain data points impact investor sentiment. While the rate of inflation has been the main data point that captures a lot of headlines, the amount of job creation in the US economy also matters. That’s mainly because how many jobs are being created in the US economy will affect how the US Federal Reserve (Fed) views the resilience of the US economy. Also known as the “payrolls report”, the number of new jobs created in the previous month in the US economy is typically released on the first Friday of each new month. Here’s why the US payrolls report is important to understanding the state of its economy and how it can also alter how the US Fed views the path of interest rates. The rate of job creation is critical to the US economy because employment and inflation are conventionally thought to have an inverse relationship – although this can sometimes be more complicated. Generally, it means that when unemployment is high, wages are stagnant and therefore wage inflation is anaemic or flat. However, when unemployment rates are low and job creation strong (as they are now) then employers normally need to pay higher wages to attract workers. This matters because higher wage growth can feed into higher overall headline inflation. Currently, the US payrolls reports – in the post-pandemic period – have been robust. For example, the latest February payrolls report, that was released on 8 March, showed that nonfarm payrolls rose by 275,000. This was much higher than economists’ average expectation of 198,000 jobs for February and continued a strong streak of job gains since the beginning of 2022.   When US jobs reports first come out, there are also revisions to the initial numbers from previous months. That’s because the first number that comes out is really just an initial gauge of the jobs added in the previous month. More definitive data comes out in the following months. This revision to the initial number can sometimes be higher or sometimes lower. So, in future, the 275,000 February 2024 jobs number could (in April or May) be revised upwards or downwards. These revisions give policymakers – like the Fed – a more accurate picture of overall employment. In that vein, January 2024 jobs numbers of initially-reported 353,000 were revised significantly downwards to 229,000 while December 2023 job growth was also revised downwards – from an initial 333,000 to 290,000. The US Federal Reserve has an official dual mandate with regards to its monetary policy, or setting of interest rates; to achieve maximum employment and keep prices stable. While the Fed’s attention in the past few years has been focused on bringing inflation down, striking a balance between optimal levels of inflation and maximum employment is difficult. The changing structure of the job market in the post-pandemic period has also made the setting of interest rates less straightforward. Before the Covid-19 pandemic, job openings (i.e. the number of posted jobs available to jobseekers) was typically in the range of 6-8 million. However, given the shortage of labour in a variety of sectors, as well as many people who retired or died during the pandemic, the number of job openings has jumped. It was as high as 12 million in early 2022 and today still remains at 8.9 million. Certain sectors, such as Food & Beverage and hospitality, continue to face severe labour shortages. That’s because many individuals, who previously worked in these sectors, left during the pandemic and never returned. That suggests that the shortage of labour is allowing wage growth to continue, which has certainly shown up in the jobs data. The latest February jobs report saw average hourly earnings – a measure of wage inflation – rise by 0.1% on the month or 4.3% year-on-year. However, that has slowed somewhat from the 5.3% year-on-year wage growth in early 2022. While US payroll reports are an important metric for deciding interest rates, investors will also want to know what the immediate impact is on the market. Generally, in the current environment of higher interest rates, a strong jobs report will mean the market thinks it’s less likely that the Fed is close to cutting interest rates. In this sense, a “bad news is good news” scenario plays out, whereby a weaker jobs number – along with potentially weaker wage growth – will result in the market being more confident that an interest rate cut is close. That’s because inflation is coming down and, according to orthodox economic beliefs, when inflation is falling there is typically a rise in the unemployment rate. While that would apply to most economic scenarios, the unique nature of the current labour market (post-pandemic) means that employment continues to remain strong even as inflation falls. As a result, both the Fed and global investors continue to watch US payrolls reports as closely as ever.