Fed Confronts Up to a Million US Jobs Vanishing in Revision

US job growth in the year through March was likely far less robust than initially estimated, which risks fueling concerns that the Federal Reserve is falling further behind the curve to lower interest rates.

Goldman Sachs Group Inc. and Wells Fargo & Co. economists expect the government’s preliminary benchmark revisions on Wednesday to show payrolls growth in the year through March was at least 600,000 weaker than currently estimated — about 50,000 a month.

While JPMorgan Chase & Co. forecasters see a decline of about 360,000, Goldman Sachs indicates it could be as large as a million.

There are a number of caveats in the preliminary figure, but a downward revision to employment of more than 501,000 would be the largest in 15 years and suggest the labor market has been

cooling for longer — and perhaps more so — than originally thought. The final numbers are due early next year. Such figures also have the potential of shaping the tone of Fed Chair Jerome Powell’s speech at week’s end in Jackson Hole, Wyoming. Investors are trying to gain insight as to when and how much the central bank will start lowering interest rates as inflation and the job market cool.

“A large negative revision would indicate that the strength of hiring was already fading before this past April,” Wells Fargo economists Sarah House and Aubrey Woessner said in a note last week. That would make “risks to the full employment side of the Fed’s dual mandate more salient amid widespread softening in other labor market data.”

Once a year, the BLS benchmarks the March payrolls level to a more accurate but less timely data source called the Quarterly Census of Employment and Wages, which is based on state unemployment insurance tax records and covers nearly all US jobs. The release of the latest QCEW report in June already hinted at weaker payroll gains last year.

As it stands now, the BLS data show the economy added 2.9 million jobs in the 12 months through March 2024, or an average of 242,000 per month. Even if the total revision is as high as a million, monthly job gains would average around 158,000 — still a healthy pace of hiring but a moderation from the post-pandemic peak.

Omair Sharif, president of Inflation Insights LLC, is optimistic the revision will end up toward the smaller end of the range of estimates, in part because QCEW data tend to be marked higher due to reporting lags.

Labor risks
The preliminary revision may reignite the debate over whether the slowdown in the labor market risks a more abrupt downshift in the economy. Employers substantially scaled back hiring in July and the unemployment rate rose for a fourth straight month. While that contributed to a $6.4 trillion global market selloff, the S&P 500 (^GSPC) has fully recovered.

“Markets, having recently experienced a growth scare that led to concerns that the Fed is behind the curve, will be monitoring Wednesday’s release of the benchmark revision to see if the market’s initial reaction was, in fact, correct,” said Quincy Krosby, chief global strategist at LPL Financial.

While other employment indicators have since reassured markets that the job market is on solid footing, policymakers are still highly expected to start lowering borrowing costs in September.

Powell and his colleagues have recently said they’re focusing more on the labor side of their dual mandate, and he’ll take the benchmark revisions into account in his Friday speech at the Fed’s annual symposium.

“While the payroll revisions due Wednesday have long been anticipated by the Fed, this will frame the atmospherics and will underline that the picture of strength in payrolls is not as vigorous as it had appeared in real time,” Evercore ISI analysts Krishna Guha and Marco Casiraghi said in a note Monday.

The government’s preliminary benchmark projection will be followed by final revisions that are incorporated into the January employment report to be released in February.

Birth-death model
For most of the recent years, monthly payroll data have been stronger than the QCEW figures. Some economists attribute that in part to the so-called birth-death model — an adjustment the BLS makes to the data to account for the net number of businesses opening and closing, but that might be off in the post-pandemic world.

Ronnie Walker at Goldman Sachs says the QCEW figures are likely to overstate the moderation in employment growth because they will strip out up to half a million unauthorized immigrants that were included in the initial estimates.

“Since the QCEW is based on unemployment insurance records, it likely largely excludes unauthorized immigrants, who we believe have contributed strongly to employment growth over the last couple of years,” Walker wrote last week.