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Weaker Than Expected Jobs Report Likely Due to the Effects of Hurricanes and Strikes

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The Bureau of Labor Statistics (BLS) releases the “Employment Situation” report (often called the “jobs report”) monthly. Economists and policymakers follow this report closely because it provides important insight into the current state of the U.S. economy. The October jobs report was released this morning, November 1 As sometimes happens, the data in the report were distorted by unusual events last month, primarily the effects of hurricanes and strikes. The BLS reported the results of its surveys without attempting to correct for these events. With respect to hurricanes, the BLS noted:

“No changes were made to either the establishment or household survey estimation procedures for the October data. It is likely that payroll employment estimates in some industries were affected by the hurricanes; however, it is not possible to quantify the net effect on the over-the-month change in national employment, hours, or earnings estimates because the establishment survey is not designed to isolate effects from extreme weather events. There was no discernible effect on the national unemployment rate from the household survey.”

Economists who participated in various surveys had forecast that payroll employment would increase by 117,500, with the unemployment rate—which is calculated from data in the household survey—being unchanged at 4.1 percent. The forecast of the unemployment rate was accurate, as the BLS reported a 4.1 percent unemployment rate in October. But the BLS reported that payroll employment had increased by only 12,000. In addition, the BLS revised downward its estimates of the employment increases in August and September by a total of 112,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had initially seemed to be particularly strong growth in employment in September, possibly indicating a significant increase in the demand for labor, has been partially reversed by the data revision.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey for October was a decline of 368,000 jobs after an increase of 430,000 jobs in September. So, the story told by the two surveys was similar: significant weakening in the job market. But we need to keep in mind the important qualification that the job market in some areas of the country had been disrupted by unusual events during the month.

Other data in the jobs report told a more optimistic story of conditions in job market. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. Although it declined from 80.9 percent to 80.6 percent, it remained high relative to levels seen since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post yesterday, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in October, up from a 3.9 percent increase in September.

The October 1-month rate of wage inflation was 4.5 percent, an increase from the 3.8 percent rate in September. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

The Federal Reserve’s policy-making Federal Open Market Committee (FOMC) has its next meeting on November 6-7. What effect will this jobs report likely have on the committee’s actions at that meeting? One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 99.8 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point (25 basis points) at its next meeting. Investors see effectively no chance of the committee leaving its target range unchanged at the current 4.75 percent to 5.00 percent or of the committee cutting its target rate by 50 basis point cut.

Investors don’t appear to believe that the acceleration in wage growth indicated by today’s jobs report will cause the FOMC to pause its rate cutting. Nor do they appear to believe that the unexpectedly small increase in payroll employment will cause the committee to cut its target for the federal funds rate by 50 basis points.

Surprisingly Strong Jobs Report

The “Employment Situation” report (often referred to as the “jobs report”), released monthly by the Bureau of Labor Statistics (BLS), is always closely followed by economists and policymakers because it provides important insight in the current state of the U.S. economy. The jobs report for August, which was released in early September, showed signs that the labor market was cooling. The report played a role in the decision by the Fed’s policy-making Federal Open Market Committee to cut its target for the federal funds rate by 0.50 percentage point (50 basis points) at its meeting on September 17-18. A 0.25 percentage point (25 basis points) cut would have been more typical.

In a press conference following the meeting, Fed Chair Jerome Powell explained that one reason that the Fed’s policy-making Federal Open Market Committee (FOMC) cut its for the federal funds rate by 50 basis points rather than by 25 basis points was the state of the labor market: “In the labor market, conditions have continued to cool. Payroll job gains averaged 116,000 per month over the past three months, a notable step-down from the pace seen earlier in the year.”

The September jobs report released this morning (October 4) indicates that conditions in the labor market appear to have turned around. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Economists surveyed by the Wall Street Journal and by Bloomberg had forecast a net increase in payroll employment of 150,000 and an unchanged unemployment rate of 4.2 percent. The BLS reported a higher net increase of 250,000 jobs and a tick down of the unemployment rate to 4.1 percent. In addition, the BLS revised upward its estimates of the employment increases in July and August by a total of 72,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had seemed from the BLS’s initial estimates to be slow growth in employment from April to June has been partly reversed by revisions. With the current estimates, employment has been increasing since July at a pace that should reduce any concerns that U.S. economy is on the brink of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey increased from 168,000 in August to 430,000 in September. So, in this case the direction of change in the two surveys was the same, with both showing strong increases in the net number of jobs created in September.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly for the second month in a row. It declined from 4.2 percent in August to 4.1 percent in September.

The household survey also provides data on the employment-population ratio. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. It’s been unchanged since July at 80.9 percent, the higest level since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in September, up from a 3.9 percent increase in August.

The 1-month rate of wage inflation of 4.5 percent in September is a decrease from the 5.6 percent rate in August. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

What effect will this jobs report likely have on the FOMC’s actions at its final two meetings of the year on November 6-7 and December 17-18? Some investors were expecting that the FOMC would cut its target for the federal funds rate by 50 basis points at its next meeting, matching the cut at its September meeting. This jobs report makes it seem more likely that the FOMC will cut its target by 25 basis points.

One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.4 percent to the FOMC cutting its target for the federal funds rate by 25 basis points percentage point at its next meeting and a probability of 2.6 percent to the FOMC leaving its target unchanged at a range of 4.75 percent to 5.00 percent. Investors see effectively no chance of a 50 basis point cut at the next meeting.

Mixed Jobs Report Sets the Stage for the FOMC to Cut Fed Funds Target

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The “Employment Situation” report (often referred to as the “jobs report”), which is released monthly by the Bureau of Labor Statistics (BLS), is always closely followed by economists and policymakers because it provides important insight in the current state of the U.S. economy. This month’s report is considered particularly important because last month’s report indicated that the labor market might be weaker than most economists had believed. As we discussed in a recent blog post, late last month Fed Chair Jerome Powell signaled that the Fed’s policy-making Federal Open Market Committee (FOMC) was likely to cut its target for the federal funds rate at its next meeting on September 17-18.

Economists and investment analysts had speculated that following August’s unexpectedly weak jobs report, another weak report might lead the FOMC to cut its federal funds target by 0.50 percentage rate rather than by the more typical 0.25 percent point. The jobs report the BLS released this morning (September 6) was mixed, showing a somewhat lower than expected increase in employment as measured by the establishment survey, but higher wage growth.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 142,000 jobs during August. This increase was below the increase of 161,000 that economists had forecast in a survey by the Wall Street Journal. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past two years. The BLS revised lower its estimates of the net increase in jobs during June and July by a total of 86,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The BLS’s estimate of average monthly job growth during the last three months is now 116,000, a significant decline from an average of 211,000 per month during the previous three months and 251,000 per month during 2023.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey. The net change in jobs as measured by the household survey increased from 67,000 in July to 168,000 in August. So, in this case the direction of change in the two surveys was the same—an increase in the net number of jobs created in August compared with July.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased from 4.3 percent to 4.2 percent—breaking what had been a five month string of unemployment rate increases.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 3.8 percent in August, up from a 3.6 percent increase in July.

The 1-month rate of wage inflation of 4.9 percent in August is a significant increase from the 2.8 percent rate in July, although it’s unclear whether the increase represented renewed upward wage pressure in the labor market or reflected the greater volatility in wage inflation when calculated this way.

What effect is this jobs report likely to have on the FOMC’s actions at its September meeting? One indication comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 73.0 percent to the FOMC cutting its target for the federal funds rate by 0.25 percentage point at its next meeting and a probability of only 27.0 percent that the cut will be 0.50 percentage point. In contrast, after the last jobs report was interpreted to indicate a dramatic slowing of the economy, investors assigned a probability of 79.5 percent to a 0.50 cut in the federal funds rate target.

It seems most likely following today’s mixed job report that the FOMC will cut its target for the federal funds rate by 0.25 percent point from the current target range of 5.25 percent to 5.50 percent to a range of 5.00 percent to 5.25 percent. The report doesn’t indicate the significant weakening in the labor market that was probably needed to push the committee to cutting its target by 0.50 percent point.

What Are “Principal Federal Economic Indicators?”

Image generated by GTP-4o “illustrating the concept of federal economic statistics.”

Government economic statistics help guide the actions of policymakers, firms, households, workers, and investors. As a recent report from the American Statistical Association expressed it:

“Official statistics from the federal government are a critically important source of needed information in the United States for policymakers and the public, providing information that meets the highest professional standards of relevance, accuracy, timeliness, credibility, and objectivity.”

Government agencies consider some of these statistics to be of particular importance. The Office of Management and Budget (OMB) has designated 36 data series as being principal federal economic indicators (PFEIs). Many of these are key macroeconomic data series, such as the consumer price index (CPI), gross domestic product (GDP), and unemployment. Others, such as housing vacancies and natural gas storage, are less familiar although important in assessing conditions in specific sectors of the economy.

Since 1985, the preparation and release of PFEIs has been governed by OMB Statistical Policy Directive No. 3. Among other things, Directive No. 3 is intended to ‘‘preserve the distinction between the policy-neutral release of data by statistical agencies and their interpretation by policy officials.’’ Although some politicians and commentators claim otherwise, federal government statistical agencies, such as the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA), are largely staffed by career government employees whose sole objective is to gather and release the most accurate data possible with the funds that Congress allocates to them.

Directive No. 3 also requires the statistical agencies to act so as to ‘‘prevent early access to information that may affect financial and commodity markets.’’ Unfortunately, several times recently the BLS has been subject to criticism for releasing data early or releasing data to financial firms before the official public release of the data. For instance, on August 21, 2o24 the BLS was scheduled to release at 10:00 a.m. its annual benchmark revision of employment estimates from the establishment survey. (We discuss this release in this blog post.) Because of technical problems, the public release was delayed until 10:30. During that half hour, analysts at some financial firms called the BLS and were given the data over the phone. Doing so was contraty to Directive No. 3 because the employment data are a PFEI, which obliges the BLS to take special care that the data aren’t made available to anyone before their public release.

The New York Times filed a Freedom of Information Act (FOIA) request with the BLS in order to investigate the cause of several instances of the agency releasing data early. In an article summarizing the information the paper received as a result of its FOIA request, the reporters concluded that “the information [the BLS] has provided [about the reasons for the early data releases] has at times proved inaccurate or incomplete.” The BLS has pledged to take steps to ensure that in the future it will comply fully with Directive No. 3.

In a report discussing the difficulties federal agencies statistical have in meeting their obligations responsibilities, the American Statistical Association singled out two problems: the declining reponse rate to surveys—particularly notable with respect to the establishment employment survey—and tight budget constraints, which are hampering the ability of some agencies to hire the staff and to obtain the other resources necessary to collect and report data in an accurate and timely manner.

Unexpectedly Weak Employment Report; Beware the Sahm Rule?

Earlier this week, as we discussed in this blog post, the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) voted to leave its target for the federal funds rate unchanged. In his press conference following the meeting, Fed Chair Jerome Powell stated that: “Overall, a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic—strong but not overheated.”

This morning (August 2), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often referred to as the “jobs report”) for July, which indicates that the labor market may be weaker than Powell and the other members of the FOMC believed it to be when they decided to leave their target for the federal funds rate unchanged.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 114,000 jobs during July. This increase was below the increase of 175,000 to 185,000 that economists had forecast in surveys by the Wall Street Journal and bloomberg.com. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past two years.

The previously reported increases in employment for April and May were revised downward by 29,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) As we’ve discussed in previous posts (most recently here), downward revisions to the payroll employment estimates are particularly likely at the beginning of a recession, although this month’s adjustments were relatively small.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey. The net change in jobs as measured by the household survey declined from 116,000 in June to 67,000 in June. So, in this case the direction of change in the two surveys was the same—a decline in the increase in the number of jobs.

As the following figure shows, the unemployment rate, which is also reported in the household survey, increased from 4.1 percent to 4.3 percent—the highest unemployment rate since October 2021. Although still low by historical standards, July was the fifth consecutive month in which the unemployment rate increased. It is also higher than the unemployment rate just before the pandemic. The unemployment rate was below 4 percent most months from mid-2018 to early 2020.

Some economists and policymakers have been following the Sahm rule, named after Claudia Sahm Chief Economist for New Century Advisors and a former Fed economist. The Sahm rule, as stated on the site of the Federal Reserve Bank of St. Louis is: “Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3 [measure]) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.” The following figure shows the values of this indicator dating back to March 1949.

So, according to this indicator, the U.S. economy is now at the start of a recession. Does that mean that a recession has actually started? Not necessarily. As Sahm stated in an interview this morning, her indicator is a historical relationship that may not always hold, particularly given how signficantly the labor market has been affected during the last four years by the pandemic.

As we noted in a post earlier this week, investors who buy and sell federal funds futures contracts assigned a probability of 11 percent that the FOMC would cut its target for the federal funds rate by 0.50 percentage point at its next meeting. (Investors in this market assigned a probability of 89 percent that the FOMC would cut its target by o.25 percentage point.) Today, investors dramatically increased the probability to 79.5 percent of a 0.50 cut in the federal funds rate target, as shown in this figure from the CME site.

Investors on the stock market appear to believe that the probability of a recession beginning before the end of the year has increased, as indicated by sharp declines today in the stock market indexes.

The next scheduled FOMC meeting isn’t until September 17-18. The FOMC is free to meet in between scheduled meetings but doing so might be interpreted as meanng that economy is in crisis, which is a message the committee is unlikely to want to send. It would likely take additional unfavorable reports on macro data for the FOMC not to wait until September to take action on cutting its target for the federal funds rate.

How Should the Fed Interpret the Monthly Employment Reports?

Jerome Powell arriving to testify before Congress. (Photo from Bloomberg News via the Wall Street Journal.)

Each month the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report. As we’ve discussed in previous blog posts, discussions of the report in the media, on Wall Street, and among policymakers center on the estimate of the net increase in employment that the BLS calculates from the establishment survey.

How should the members of the Fed’s policy-making Federal Open Market Committee interpret these data? For instance, the BLS reported that the net increases in employment in June was 206,000. (Always worth bearing in mind that the monthly data are subject to—sometimes substantial—revisions.) Does a net increase of employment of that size indicate that the labor market is still running hot—with the quantity of labor demanded by businesses being greater than the quantity of labor workers are supplying—or that the market is becoming balanced with the quantity of labor demanded roughly equal to the quantity of labor supplied?

On July 9, in testimony before the Senate Banking Committee indicated that his interpretation of labor market data indicate that: “The labor market appears to be fully back in balance.” One interpretation of the labor market being in balance is that the number of net new jobs the economy creates is enough to keep up with population growth. In recent years, that number has been estimated to be 70,000 to 100,000. The number is difficult to estimate with precision for two main reasons:

There is some uncertainty about the number of older workers who will retire. The more workers who retire, the fewer net new jobs the economy needs to create to accommodate population growth.
More importantly, estimates of population growth are uncertain, largely because of disagreements among economists and demographers over the number of immigrants who have entered the United States in recent years.

In calculating the unemployment rate and the size of the labor force, the BLS relies on estimates of population from the Census Bureau. In a January report, the Congressional Budget Office (CBO) argued that the Census Bureau’s estimate of the population of the United States is too low by about 6 million people. As the following figure from the CBO report indicates, the CBO believes that the Census Bureau has underestimated how much immigration has occurred and what the level of immigration is likely to be over the next few years. (In the figure, SSA refers to the Social Security Administration, which also makes forecasts of population growth.)

Some economists and policymakers have been surprised that low levels of unemployment and large monthly increases in employment have not resulted in greater upward pressure on wages. If the CBO’s estimates are correct, the supply of labor has been increasing more rapidly than is indicated by census data, which may account for the relative lack of upward pressure on wages. If the CBO’s estimates of population growth are correct, a net increase in employment of 200,000, as occured in June, may be about the number necessary to accommodate growth in the labor force. In other words, Chair Powell would be correct that the labor market was in balance in June.

In a recent publication, economists Nicolas Petrosky-Nadeau and Stephanie A. Stewart of the Federal Reserve Bank of San Francisco look at a related concept: breakeven employment growth—the rate of employment growth required to keep the unemployment rate unchanged. They estimate that high rates of immigration during the past few years have raised the rate of breakeven employment growth from 70,000 to 90,000 jobs per month to 230,000 jobs per month. This analysis would be consistent with the fact that as net employment increases have averaged 177,000 over the past three months—somewhat below their estimate of breakeven employment growth—the unemployment rate has increased from 3.8 percent to 4.1 percent.

Latest Jobs Report May Indicate the Labor Market Is Weakening

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Recent macroeconomic data have been sending mixed signals about the state of the U.S. economy. The growth in real GDP, industrial production, retail sales, and real consumption spending has been slowing. Growth in employment has been a bright spot—showing steady net increases in job growth above the level necessary to keep up with population growth. Even here, though, as we discuss in a recent blog post, the data may be overstating the actual strength of the labor market.

This morning (July 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often referred to as the “jobs report”) for June, which, while seemingly indicating continued strong job growth, also provides some indications that the labor market may be weakening. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 206,000 jobs during April. This increase was a little above the increase of 1900,000 to 200,000 that economists had forecast in surveys by the Wall Street Journal and bloomberg.com. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past to years.

It’s notable that the previously reported increases in employment for April and May were revised downward by 110,000 jobs, or by about 25 percent. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) As we’ve discussed in previous posts (most recently here), revisions to the payroll employment estimates can be particularly large at the beginning of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey. The net increase in jobs as measured by the household survey increased from –408,000 in May (that is, employment by this measure fell during May) to 116,000 in June.

Note that the BLS also reports a survey for household employment adjusted to conform to the concepts and definitions used to construct the payroll employment series. After this adjustment, over the past 12 months household employment has increased by 32.5 million less than has payroll employment. Clearly, this is a very large discrepancy and may be indicating that the payroll survey is substantially overstating growth in employment.

The unemployment rate, which is also reported in the household survey, ticked up slightly from 4.0 percent to 4.1 percent. Although still low by historical standards, June was the fourth consecutive month in which the unemployment rate increased.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure show the percentage change in the AHE from the same month in the previous year. The 3.9 percent increase for June continues a downward trend that began in January and is the smallest increase since June 2021.

The 1-month rate of wage inflation of 3.5 percent in June is a significant decrease from the 5.3 percent rate in May, although it’s unclear whether the decline was an additional sign that the labor market is weakening or reflected the greater volatility in wage inflation when calculated this way.

What effect is today’s job reports likely to have on the Fed’s policy-making Federal Open Market Committee as it considers changes in its target for the federal funds rate? As always, it’s a good idea not to rely too heavily on a single data point—particularly because, as we noted earlier, the establishment survey employment data is subject to substantial revisions. But the Wall Street Journal’s headline that the “Case for September Rate Cut Builds After Slower Jobs Data,” seems likely to be accurate.

Is the U.S Labor Market Weaker Than It Seems?

The monthly “Employment Situation” report from the Bureau of Labor Statistics (BLS) is closely watched by economists, investment analysts, and Federal Reserve policymakers. Many economists believe that the payroll employment data from the report is the best single indicator of the current state of the economy.

Most economists, inside and outside of the government, accept the dates determined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) for when a recession begins and ends. Although that committee takes into account a variety of macroeconomic data series, the peak of a business cycle as determined by the committee almost always corresponds to the peak in payroll employment and the trough of a business cycle almost always corresponds to the trough in payroll employment.

One drawback to relying too heavily on payroll employment data in gauging the state of the economy is that the data are subject to—sometimes substantial—revisions. As the BLS explains: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.” The revisions can be particularly large at the beginning of a recession.

For example, the following figure shows revisions the BLS made to its initial estimates of the change in payroll employment during the months around the 2007–2009 recession. The green bars show months for which the BLS revised its preliminary estimates to show that fewer jobs were lost (or that more jobs were created), and the red bars show months for which the BLS revised its preliminary estimates to show that more jobs were lost (or that fewer jobs were created).

For example, the BLS initially reported that employment declined by 159,000 jobs during September 2008. In fact, after additional data became available, the BLS revised its estimate to show that employment had declined by 460,000 jobs during the month—a difference of 300,000 more jobs lost. As the recession deepened between April 2008 and April 2009, the BLS’s initial reports underestimated the number of jobs lost by 2.3 million. In other words, the recession of 2007–2009 turned out to be much more severe than economists and policymakers realized at the time.

The BLS also made substantial revisions to its initial estimates of payroll employment for 2020 and 2021 during the Covid pandemic, as the following figure shows. (Note that this figure appears in our new 9th edition of Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1 and Essentials of Economics, Chapter 13, Section 13.1).)

The BLS initially estimated that employment in March 2020 declined by about 700,000. After gathering more data, the BLS revised its estimate to indicate that employment declined by twice as much. Similarly, the BLS’s initial estimates substantially understated the actual growth in employment from August to December 2021. After gathering more data, the BLS revised its estimate to indicate that nearly 2 million more jobs had been created during those months than it had originally estimated.

Just as the initial estimates for total payroll employment are often revised by sutbstantial amounts up or down, the same is true of the initial estimates of payroll employment in individual industries. Because the number of establishments surveyed in any particular industry can be small, the initial estimates can be highly inaccurate. For instance, Justin Fox, a columnist for bloomberg.com recently noted what appears to be a surge in employment in the “sports teams and clubs” industry. As the following figure shows, employment in this industry seems to have increased by an improbably large 75 percent. Was there a sudden increase in the United States in the number of new sports teams? Certainly not over just a few months. It’s more likely that most of the increase in employment in this industry will disappear when the initial employment estimates are revised.

One source of data for the BLS revisions to the monthly payroll employment data is the BLS’s “Quarterly Census of Employment and Wages.” The QCEW is based on the reports required of all firms that participate in the state and federal unemployment insurance program. The BLS estimates that 95 percent of all jobs in the United States are included in the QCEW data. As a result, the QCEW surveys about 11.9 million establishments as opposed to the 666,000 establishments included in the establishment survey.

The BLS uses the QCEW to benchmark the payroll employment data, which reconciles the two series. The BLS makes the revisions with a lag. For instance, the payroll employment data for 2023 won’t be revised using the QCEW data until August 2024. Looking at the 2023 employment data from the two series shows a large discrepancy, as seen in the following figure.

The blue line shows the employment data from the establishment survey and the orange line shows the data from the QCEW survey. (Both series are of nonseasonally adjusted data.) The values on the vertical axis are thousands of workers. In December 2023, the establishment survey indicated that a total of 158,347,000 people were employed in the nonfarm sector in the United States. The QCEW series shows a total of 154,956,133 people were employed in the nonfarm sector—about 3.4 million fewer.

How can we interpret the discrepancy between the employment totals from the two series? The most straightforward interpretation is that the QCEW data, which uses a larger sample, is more accurate and payroll employment has been significantly overstating the level of employment in the U.S. economy. In other words, the labor market was weaker in 2023 than it seemed, which may help to explain why inflation slowed as much as it did, particularly in the second half of the year.

However, this interpretation is not clear cut because the QCEW data are also subject to revision. As Ernie Tedeschi, director of economics at the Budget Lab at Yale and former chief economist for the Council of Economic Advisers, has pointed out, the QCEW data are typically revised upwards, which would close some of the gap between the two series. So, although it seems likely that the closely watched payroll employment data have overstated the strength of the labor market, we won’t get a clearer indication of how large the overstatement is until August when the BLS will use the QCEW data to benchmark the payroll employment data.

What Does the Latest Jobs Report Tell Us about the State of the U.S. Economy?

Image of “people working in a store” generated by ChatGTP 4o.

This morning (June 7), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report for May. Recent government releases of macroeconomic data have indicated that the expansion of the U.S. economy is slowing. For instance, as we noted in this recent post on the JOLTS report, the labor market seems to be normalizing. Real personal consumption expenditures declined from March to April. The Federal Reserve Bank of New York’s Nowcast of real GDP growth during the current quarter declined from 2.74 percent at the end of April to 1.76 percent at the end of May. That decline reflects some weakness in the data series the economists at the New York Fed use to forecast current real GDP growth

In that context, today’s jobs report was, on balance, surprisingly strong. The report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 272,000 jobs during May. This increase was well below the increase of 190,000 that economists had forecast in a survey by the Wall Street Journal and well above the net increase of 165,000 during April. (Bloomberg’s survey of economists yielded a similar forecast of an increase of 180,000.) The increase was also higher than the 232,000 average monthly increase during the past year. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past two years.

The surprising strength in employment growth in establishment survey was not echoed in the household survey, which reported a net decrease of 408,000 jobs. As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey, and—as noted earlier—the two surveys are of somewhat different groups. Still, the discrepancy between the two survey was notable.

The unemployment rate, which is also reported in the household survey, ticked up slightly from 3.9 percent to 4.0 percent. This is the first time that the unemployment has reached 4.0 percent since January 2022.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure show the percentage change in the AHE from the same month in the previous year. The 4.1 percent increase in May was a slight increase from the 4.0 percent increase in April. The increase in the rate of wage inflation is in contrast with the decline in employment and increase in the unemployment rate in the same report.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic.
The 1-month rate of wage inflation of 4.9 percent in May is a sharp increase from the 2.8 percent rate in April, although it’s unclear whether the increase represents a significant acceleration in wage inflation or is just reflecting the greater volatility in wage inflation when calculated this way.

To answer the question posed in the title to this post, the latest jobs report is a mixed bag that doesn’t send a clear message as to the state of the economy. The strong increase in employment and the increase in the rate of wage growth indicate that economy may not be slowing sufficiently to result in inflation declining to the Federal Reserve’s 2 percent annual target. On the other hand, the decline in employment as measured in the household survey and the tick up in the unemployment rate, along with the data in the recent JOLTS report, indicate that the labor market may be returning to more normal conditions.

It seems unlikely that this jobs report will have much effect on the thinking of the Fed’s policy-making Federal Open Market Committee (FOMC), which has its next meeting next week on June 11-12.

What Can We Conclude from a Weaker than Expected Employment Report?

This morning (May 3), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report for April. The report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 175,000 jobs during April. This increase was well below the increase of 240,000 that economists had forecast in a survey by the Wall Street Journal and well below the net increase of 315,000 during March. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past to years.

The unemployment rate, which is also reported in the household survey, ticked up slightly from 3.8 percent to 3.9 percent. It has been below 4 percent every month since February 2022.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this recent post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure show the percentage change in the AHE from the same month in the previous year. The 3.9 percent value for April continues a downward trend that began in February.

The 1-month rate of wage inflation of 2.4 percent in April is a significant decrease from the 4.2 percent rate in March, although it’s unclear whether the decline was a sign that the labor market is weakening or reflected the greater volatility in wage inflation when calculated this way.

The macrodata released during the first three months of the year had, by and large, indicated strong economic growth, with the pace of employment increases being particularly rapid. Wages were also increasing at a pace above that during the pre-Covid period. Inflation appeared to be stuck in the range of 3 percent to 3.5 percent, above the Fed’s target inflation rate of 2 percent.

Today’s “Employment Situation” report may be a first indication that growth is slowing sufficiently to allow the inflation rate to fall back to 2 percent. This is the outcome that Fed Chair Jerome Powell indicated in his press conference on Wednesday that he expected to occur at some point during 2024. Financial markets reacted favorably to the release of the report with stock prices jumping and the interest rate on the 10-year Treasury note falling. Many economists and Wall Street analysts had concluded that the Fed’s policy-making Federal Open Market Committee (FOMC) was likely to keep its target for the federal funds rate unchanged until late in the year and might not institute a cut in the target at all this year. Today’s report caused some Wall Street analysts to conclude, as the headline of an article in the Wall Street Journal put it, “Jobs Data Boost Hopes of a Late-Summer Rate Cut.”

This reaction may be premature. Data on employment from the establishment survey can be subject to very large revisions, which reinforces the general caution against putting too great a weight one month’s data. Its most likely that the FOMC would need to see several months of data indicating a slowing in economic growth and in the inflation rate before reconsidering whether to cut the target for the federal funds rate earlier than had been expected.