US Payrolls Likely Overstated by Most Since 2009, Paving Way for Fed Rate Cuts

Recent data indicates that U.S. job growth over the past year may have been significantly overestimated, putting additional pressure on the Federal Reserve to consider interest rate cuts as early as next month. Preliminary benchmark revisions from the Bureau of Labor Statistics (BLS) suggest that payrolls will likely be revised down by 818,000 jobs for the 12 months through March, equating to roughly 68,000 fewer jobs per month. This revision marks the largest downward adjustment since 2009.

While many economists had anticipated a decline, some had forecasted an even more substantial revision, potentially up to 1 million jobs. The final figures, which are expected early next year, will provide a clearer picture. These revisions imply that the labor market may have started to cool much sooner than initially reported, contradicting earlier data that suggested robust job growth.

Before the revisions, BLS data showed that employers had added 2.9 million jobs during the period, averaging 242,000 per month. With the new adjustments, the monthly average is expected to drop to around 174,000—a figure that, while still positive, reflects a slowdown from the post-pandemic hiring surge.

“The revisions are not entirely unexpected, given that estimates had already pointed to a possible overstatement of up to one million jobs,” noted Robert Frick, Corporate Economist at Navy Federal Credit Union. “While this doesn’t negate the fact that the economy is still expanding, it does suggest that monthly job growth will likely be more subdued, increasing the likelihood of a Fed rate cut.”

Following the release of the data, U.S. Treasuries edged higher, as investors grew more confident that the Federal Reserve might begin cutting interest rates in September. Market expectations now suggest a quarter-point reduction, with a 20% chance of a more substantial half-point cut.

The data release was scheduled for 10 a.m. in Washington, but a delay of over 30 minutes in posting the figures on the BLS website raised some eyebrows. The BLS later acknowledged the delay but did not provide further details.

These revisions will play a crucial role in shaping Fed Chair Jerome Powell’s assessment of the labor market, particularly as he prepares for his speech at the central bank’s annual symposium in Jackson Hole, Wyoming. With inflation easing from its pandemic peak, the Fed’s focus has shifted more towards labor market conditions, a key aspect of its dual mandate.

While such benchmark revisions are an annual occurrence, this year’s adjustments have been under particular scrutiny. Economists have suggested that various factors, including business closures, openings, and the counting of unauthorized immigrant workers, may have skewed the initial payroll data.

Sector Breakdown The revisions were most significant in the professional and business services sector, which accounted for nearly half of the downward adjustment. Other sectors, including leisure and hospitality, manufacturing, and retail trade, also saw their job growth figures revised downward.

The BLS’s monthly employment report is based on two surveys: one that collects payroll data from businesses and another that measures unemployment from households. The revisions announced on Wednesday pertain only to the payroll survey and do not affect the unemployment rate.

Each year, the BLS benchmarks March payroll figures to a 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 nearly all U.S. jobs.

According to the QCEW, employment rose by 1.3% in the year through March 2024, compared to a 1.9% increase suggested by the initial monthly payroll data. The final revisions, due in January 2025, will offer a month-by-month breakdown of these adjustments.

In recent years, initial payroll data have consistently been stronger than the QCEW figures. Some economists attribute this discrepancy to the birth-death model, an adjustment made by the BLS to account for the net number of businesses opening and closing, which may have been skewed by the post-pandemic economic environment.

Another potential factor is immigration. The QCEW is based on unemployment insurance records, which undocumented workers are typically not eligible for, possibly leading to an undercount of unauthorized workers included in the initial payroll estimates.

Analysis and Market Impact

For investors, the significant downward revision in payroll data could mark a turning point in Federal Reserve policy, increasing the likelihood of interest rate cuts in the near term. This shift would have profound implications across financial markets, potentially leading to lower yields on Treasuries and a more favorable environment for equities.

The labor market’s earlier-than-expected cooling suggests that the economy may not be as strong as previously thought, which could prompt the Fed to act more aggressively to avoid a deeper slowdown. Investors should closely monitor upcoming economic data and Fed communications, particularly Powell’s speech at Jackson Hole, for further clues on the central bank’s policy direction.