US Job Growth Revision: Potential Impact on Fed Policy

Significant Downward Revision Expected for US Job Growth

U.S. job growth in the year through March may have been considerably weaker than current government figures suggest, highlighting that the U.S. labor market may have already entered a slowdown phase even before the noticeable slowdown in hiring during the summer.

Economists at institutions like Wells Fargo, Union Bank, and Pantheon Macroeconomics anticipate that the preliminary benchmark revision released by the Labor Department on Tuesday will reveal a total decrease in job numbers approaching 800,000 compared to current estimates, which translates to a monthly shortfall of about 67,000 jobs. Other institutions, such as Nomura Securities, Bank of America, and Royal Bank of Canada, expect the decrease to be closer to one million jobs.

Impact of the Revision on Federal Reserve Monetary Policy

Even though this report pertains to past job growth, a significant downward revision would indicate that the labor market last year was not as robust as previously believed, reinforcing expectations that the Federal Reserve will embark on a series of interest rate cuts.

Additionally, a substantial adjustment to job figures for the second consecutive year could provoke the ire of former U.S. President Donald Trump, who has repeatedly criticized the accuracy of Labor Department data.

Revision Mechanism and Its Impact

The Labor Department annually compares employment levels for a year ending in March with a more accurate but less timely data source called the "Quarterly Census of Employment and Wages" (QCEW). This survey is based on state unemployment insurance tax records and covers nearly all jobs in the United States. Additionally, the department revises monthly employment reports to improve data accuracy.

According to economist Bill Adams from Union Bank, the significant downward revision to job growth through March 2025 will have less impact on monetary policy compared to downward revisions to job growth in recent months, but it will set a broader backdrop for the overall economic performance. He added that any downward revision to job growth will increase pressure on the Federal Reserve to ease its monetary policy.

Different Perspectives on Monetary Policy

This will strengthen the position of those who believe that the Federal Reserve should have started easing monetary policy earlier. Federal Reserve Governor Christopher Waller voted to cut interest rates at the last July meeting, while other officials chose to keep interest rates unchanged. He indicated that he expects the baseline revision to reduce the average monthly job growth by about 60,000 jobs. It is widely anticipated that policymakers will cut borrowing costs at their meeting next week.

Potential Political Implications

Although these adjustments will not change our current understanding of the labor market, they will indicate that the slowdown in hiring that we have witnessed in recent months actually started earlier. The former Trump administration could use Tuesday's data as evidence that job growth was slowing before he took office. The final data will be published in early next year.

Samuel Tombs, Chief U.S. Economist at Pantheon Macroeconomics, believes that this primarily reflects job creation before Trump's term, and therefore he could argue that this is an indication that the economy he inherited was actually much weaker than we thought.

"Business Birth and Death" Model

For most of the past few years, monthly employment data has shown stronger job growth than QCEW data. Some economists attribute this difference in part to the so-called "business birth and death" model, which is an adjustment made by the Labor Department to account for the net number of jobs created by the opening and closing of businesses in a given month. Since the pandemic, this calculation process has become more difficult.

While others see another reason behind this difference: immigration. Although the monthly employment report does not ask about citizenship, the QCEW report relies on unemployment insurance records, and undocumented immigrants cannot apply for them.

Conclusion

Ultimately, economists and policymakers will use the preliminary data to assess the pace of the labor market slowdown, awaiting the government's publication of the final and most complete data for 2025 in February of next year. Understanding these revisions in a broader context is crucial to assessing the overall health of the U.S. economy and making informed monetary policy decisions.