US Job Growth Revision: How a Downward Adjustment Could Impact the Fed

US Job Growth Expected to Face Significant Downward Revision

Job growth in the United States for the year ending in March of this year may be significantly weaker than current government data suggests, highlighting the possibility that the US labor market entered a slowdown phase well before the noted deceleration in hiring this summer.

Economists from institutions like Wells Fargo, Union Bank, and Pantheon Macroeconomics anticipate that the preliminary benchmark revision from the Bureau of Labor Statistics (BLS) will reveal a total employment figure nearly 800,000 jobs lower than currently estimated. This equates to an average monthly shortfall of approximately 67,000 jobs. Nomura Securities, Bank of America, and Royal Bank of Canada project an even larger downward adjustment, potentially approaching one million jobs.

Impact on Federal Reserve Monetary Policy

While this report pertains to past job growth, a substantial downward revision would suggest that the labor market last year was not as robust as previously believed, reinforcing expectations that the Federal Reserve will implement a series of interest rate cuts. Such a revision would increase pressure on the Fed to ease monetary policy, especially as current inflation data shows signs of cooling.

Moreover, this revision will bolster the position of those who believe the Federal Reserve should have begun easing monetary policy sooner. Notably, Federal Reserve Governor Christopher Waller voted in favor of a rate cut at the Federal Open Market Committee meeting in July, though officials ultimately chose to maintain rates unchanged.

Potential Political Ramifications

Although these revisions will not alter the current understanding of the labor market, they will indicate that the slowdown witnessed in recent months began earlier than previously thought. The US administration might use this data as evidence that job growth was decelerating before they took office. However, it's important to note that the final data will be released early next year.

The 'Business Births and Deaths' Model and Measurement Challenges

For most of the past few years, monthly employment data has shown stronger growth than the QCEW data. Some economists attribute this difference in part to the so-called 'business births and deaths' model, an adjustment made by the BLS to account for the net jobs created by new and emerging businesses and those that fail and close. However, these calculations have become more difficult since the onset of the COVID-19 pandemic.

Others believe that there is another reason behind this difference: immigration. While monthly employment reports do not inquire about citizenship, QCEW reports rely on unemployment insurance records, and undocumented immigrants cannot apply for them. Therefore, QCEW data may not fully reflect the participation of this group of workers in the labor market.

Conclusion

Ultimately, economists and policymakers will use the preliminary data to assess the pace of the labor market slowdown, awaiting the government's release of the final and more comprehensive 2025 data next February. The key question remains: Have we truly reached a turning point in the labor market? Future data will reveal the answer.