By Reade Pickert | Bloomberg
Forecasts suggest that US payroll growth for the year through March may be weaker than current data indicate, potentially missing out on about 500,000 jobs. JPMorgan Chase & Co.’s Daniel Silver estimates that the government’s preliminary benchmark revision could result in a reduction of nearly half a million jobs in March alone, translating to approximately 40,000 fewer jobs per month over the 12-month period.
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However, even with a downward revision of that magnitude, average job growth would still be strong at around 300,000 payrolls per month. Therefore, these revisions are unlikely to significantly change economists’ perceptions of the labor market’s health.
Oscar Munoz, chief US macro strategist at TD Securities, stated, “While we expect the BLS preliminary estimates to indicate that payrolls growth has not been as strong as initially reported, revisions are not likely to be so large as to suggest a meaningful shift in labor market conditions.”
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In the past year, the government’s employment reports consistently surprised economists with higher-than-expected growth in payrolls. These figures played a crucial role in the Federal Reserve’s decision to increase interest rates in order to control inflation.
Every month, the Bureau of Labor Statistics (BLS) releases an estimate of payrolls based on responses from a sample of employers. The two previous months are typically revised as more businesses provide their payroll data.
Once a year, the BLS benchmarks the March payrolls level to a more accurate but less timely source known as the Quarterly Census of Employment and Wages (QCEW). The QCEW data, which cover nearly all US jobs, are based on state unemployment insurance tax records. The adjustment made to align the March payroll figures with the QCEW count is then distributed proportionally across the year ending in March.
This Wednesday, the first-quarter QCEW figures will be released. Currently, the reported payroll growth is stronger than what the QCEW data imply, leading economists to expect a downward revision in the preliminary benchmark projection. Minutes from the Federal Reserve’s June policy meeting even mentioned this discrepancy.
For Munoz, the message is likely to remain the same, indicating a labor market that continues to normalize steadily.
The strength of the labor market is crucial to the resilience of the US economy, and economists have been closely monitoring it for any signs of weakness. Although job gains have moderated, they still indicate a robust demand for labor.
Bloomberg Economics’ Stuart Paul believes that the QCEW data will confirm the group’s long-held view that the labor market is weaker than commonly believed. He warned that those who have been proclaiming the market as tight may be in for a surprise.
Meanwhile, Standard Chartered Bank’s Steve Englander estimates a downward revision of around 650,000 jobs, with most of the weakness occurring in recent quarters. This would suggest a much weaker labor market profile than what influenced the Federal Reserve’s recent tightening measures, leading to reduced pressure for further interest rate hikes.
The government’s preliminary benchmark projection will be followed by final revisions that are incorporated into the January employment report released in February.
Birth-death model
One reason economists argue that the monthly payroll data show more strength than the QCEW figures is due to the birth-death adjustment. This adjustment accounts for new businesses opening and others closing during any given month. The BLS uses historical data to estimate the impact on various industries within their sample.
Jonathan Millar, senior economist at Barclays Plc, stated, “A lot of people actually think that the birth-death adjustment in the establishment survey is too large. However, if you look at other data sources, like new business applications, it suggests that probably the birth-death adjustments are just fine.”
Millar added, “I wouldn’t be surprised if the revision ended up being smaller than what you might infer from the fourth quarter. I also wouldn’t be surprised if it showed a positive revision.” In fact, he noted that the preliminary benchmark announcement may be negative but could completely disappear by the time the official data are published early next year if the QCEW data are revised upward.
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