Employment data is expected to undergo significant revisions, with millions of jobs disappearing, which will impact the Federal Reserve's interest rate decisions

The Federal Reserve falls far behind expectations in lowering interest rates.

According to the Intelligence Finance APP, economists from Goldman Sachs and Wells Fargo Bank expect that the preliminary benchmark revision data released by the government on Wednesday will show that job growth in the year ending in March will be at least 600,000 lower than current estimates, with a decrease of about 50,000 jobs per month.

J.P. Morgan predicts a decrease in the number of unemployed by about 360,000, while Goldman Sachs suggests that the number of unemployed could decrease by as much as 1 million.

There are some notable points in the preliminary data, but a downward revision of over 500,000 jobs would be the largest in 15 years, indicating that the cooling of the labor market is lasting longer than initially expected, and possibly even longer. The final data for the job market this year will be released early next year.

These data may also affect the tone of Federal Reserve Chairman Powell's speech at the Jackson Hole this weekend. With inflation and a cooling job market, investors are trying to understand when the Fed will start cutting interest rates and the pace of rate cuts.

Revision magnitude of employment data over the years

Wells Fargo Bank economists Sarah House and Aubrey Woessner stated in a report last week: "The significant negative revision indicates that hiring had already weakened before April this year." This will make the risks in the Fed's dual mandate of full employment more prominent "in the context of generally weak labor market data."

The U.S. Bureau of Labor Statistics compares the March employment figures every year with the more accurate but less timely data source, the Quarterly Census of Employment and Wages (QCEW), which is based on state unemployment insurance tax records and covers almost all U.S. jobs. The latest QCEW report released in June has already hinted at weaker job growth last year.

Former President Trump called attention to the upcoming revisions at a campaign rally in Howell, Michigan on Tuesday, pointing out that job growth in the year ending in March may be much weaker than initially shown in government data.

Currently, data from the U.S. Bureau of Labor Statistics shows that in the 12 months ending in March 2024, the U.S. economy added 2.9 million new jobs, averaging 242,000 new jobs per month. Even with a total revision of up to 1 million, the average monthly job growth would still be around 158,000 - which is still a healthy hiring pace, but slower compared to the peak after the pandemic.

Omair Sharif, President of Inflation Insights LLC, optimistically believes that the revised data will ultimately tend towards the lower end of the estimate range, partly because QCEW data is often marked higher due to reporting lags

Employment Market Risks

The preliminary adjustments may reignite the debate on whether a slowdown in the labor market will lead to a more severe economic downturn. Employers significantly cut back on hiring in July, leading to a fourth consecutive month of rising unemployment rates. Despite this causing a global market sell-off of $6.4 trillion, the S&P 500 index has fully recovered lost ground.

Quincy Krosby, Chief Global Strategist at LPL Financial, stated, "The market recently experienced a growth panic, causing concerns about the slow response of the Federal Reserve. The market will focus on the benchmark revision data released on Wednesday to see if the initial market reaction was correct."

While other employment indicators have proven to the market that the labor market foundation is solid, the market still highly anticipates policymakers to begin lowering borrowing costs in September.

Powell and his colleagues recently stated that they will pay more attention to the labor aspect of the dual mandate, and he will consider the benchmark revision in his speech at the Fed's annual symposium on Friday.

Analysts Krishna Guha and Marco Casiraghi from Evercore ISI stated in a report on Monday, "Although the Federal Reserve has long anticipated the wage revision data to be released on Wednesday, this will determine the atmosphere of the labor market, emphasizing that wage growth may not be as strong as real-time indicators suggest."

The government's preliminary benchmark forecasts will undergo final revisions and will incorporate the January employment report to be released in February.

In recent years, monthly employment data has consistently been stronger than QCEW data. Some economists attribute this in part to the so-called birth-death model - an adjustment made by the Bureau of Labor Statistics to reflect the net number of openings and closures of businesses, but in the post-pandemic era, this adjustment may not be accurate.

Analyst Anna Wong stated, "Factors that have led to an exaggeration of employment growth still exist. After the birth-death distortion adjustment, employment figures for April and July 2024 are most likely to be revised to near zero - well below the pace consistent with the neutral unemployment rate."

Ronnie Walker from Goldman Sachs suggested that QCEW data may overstate the slowdown in employment growth as they exclude up to 500,000 undocumented immigrants included in the initial estimates.

Walker wrote last week, "As QCEW is based on unemployment insurance records, it likely largely excludes undocumented immigrants, who we believe have made significant contributions to employment growth in recent years."