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October and November Jobs Data Give Mixed Picture of the Labor Market

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Because of the federal government shutdown from October 1 to November 12, the regular release by the Bureau of Labor Statistics (BLS) of its monthly “Employment Situation” report (often called the “jobs report”) has been disrupted. The jobs report usually 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 Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Today, the BLS released a jobs report that has data from the payroll survey for both October and November, but data from the household survey only for November. Because of the government shutdown, the household survey for October wasn’t conducted.

According to the establishment survey, there was a net decrease of 105,000 nonfarm jobs in October and a net increase of 64,000 nonfarm jobs in November. The increase for November was above the increase of 40,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a net increase of 45,000 jobs. The BLS revised downward by a combined 33,000 jobs its previous estimates of employment in August and September. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure illustrates that, as the BLS notes in the report, nonfarm payroll employment “has shown little net change since April.” The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects. In addition, a sharp decline in immigration has slowed growth in the labor force.

The unemployment rate estimate relies on data collected in the household survey, so there id no unemployment estimate for October. As shown in the following figure, the unemployment rate increased from 4.4 percent in September to 4.6 percent in November, the highest rate since September 2021. The unemployment rate is above the 4.4 percent rate economists surveyed by FactSet had forecast. The unemployment rate had been remarkably stable, staying between 4.0 percent and 4.2 percent in each month from May 2024 to July 2025, before breaking out of that range in August. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is now well above the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 96,000 jobs from September to November. In the payroll survey, there was a net decrease in of 41,000 jobs from September to November. In any particular month, the story told by the two surveys can be inconsistent. In this case, we are measuring the change in jobs over a two month interval because there is no estimate from the household survey of employment in October. Over that two month period the household survey is showing more strength in the labor market than is the payroll survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In November the ratio was 80.6 percent, down slightly from 80.7 in September. (Again, there is no estimate for October.) The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The continued high levels of the prime-age employment-population ratio indicates some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline federal government employment of 162,000 in October, with an additional decline of 6,000 In November. The total decline since the beginning of February 2025 is 271,000. At this point, we can say that the decline in federal employment has had a significant effect on the overall labor market and may account for some of the rise in the unemployment rate.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.5 percent in November, down from 3.7 percent in October.

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 wage 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. In November, the 1-month rate of wage inflation was 1.6 percent, down from 5.4 percent in October. This slowdown in wage growth may be an indication of a weakening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Open Market Committee (FOMC) with respect to setting its target range for the federal funds rate? Today’s jobs report provides a mixed take on the state of the labor market with very slow job growth—although the large decline in federal employment is a confounding factor—a continued high employment-population ratio for prime age workers, and slowing wage growth.

Surprisingly Strong September Jobs Report

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If not for the shutdown of the federal government, the Bureau of Labor Statistics (BLS) would have already released its “Employment Situation” report (often called the “jobs report”) for September and October by now. The September jobs report was released today based largely on data collected before the shutdown.

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 Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Because the household survey wasn’t conducted in October, the data in the October report that relies on the household survey won’t be included when the BLS releases establishment employment data for October on December 16. The data for September released today showed the labor market was stronger than expected in that month.

According to the establishment survey, there was a net increase of 119,00 nonfarm jobs during September. This increase was well above the increase of 50,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had also forecast a net increase of 50,000 jobs. The relatively large increase in employment in September was partially offset by the BLS revising downward by a combined 33,000 jobs its previous estimates of employment in July and August. The estimate for August was revised from a net gain of 22,000 to a net loss of 4,000. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure makes clear the striking deceleration in job growth beginning in May. The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects.

As shown in the following figure, the unemployment rate increased from 4.3 percent in August to 4.4 percent in September, the highest rate since October 2021. The unemployment rate is above the 4.3 percent rate economists surveyed by FactSet had forecast. The unemployment rate had been remarkably stable, staying between 4.0 percent and 4.2 percent in each month from May 2024 to July 2025, before breaking out of that range in August. In September, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate during the fourth quarter of 2025 would average 4.5 percent. The FOMC’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given slower growth in the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 111,878 net new jobs each month to keep the unemployment rate stable at 4.4 percent. If this estimate is accurate, if the average monthly net job increase from May through September of 38,600 were to continue, the result would be a rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 251,000 jobs in September, following a net increase of 288,000 jobs in August. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent. as was the case in September with employment increasing much more in the household survey than in the employment survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In September the ratio was 80.7 percent, the same as in August. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The continued high levels of the prime-age employment-population ratio indicates strength in the labor market.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 3,000 in September and a total decline of 97,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has had only a small effect on the overall labor market.

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 wage 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. In September, the 1-month rate of wage inflation was 3.0 percent, down from 5.1 percent in August. This slowdown in wage growth may be an indication of a weakening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target range for the federal funds rate? The minutes from the FOMC’s last meeting on October 28–29 indicate that committee members had “strongly differing views” over whether to cut the target range by 0.25 percentage point (25 basis points) at its next meeting on December 9–10 or to leave the target range unchanged.

One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) A month ago, investors assigned a 98.8 percent probability of the committee cutting its target range to 3.50 percent to 3.75 percent at its December meeting. Since that time indications have increased that output and employment growth have continued to be relatively strong and that inflation is stuck above the Fed’s 2 percent annual target. This morning, as the following figure shows, investors assign a probability of 60. 4 percent to the committee keeping its target unchanged at 3.75 percent to 4.00 percent at the December meeting. Committee members will also release their Summary of Economic Projections (SEP) at that meeting. The SEP, along with Fed Chair Powell’s remarks at his press conference following the meeting, should provide additional information on the monetary policy path the committee intends to follow in the coming months.

Fed Has Apparently Lost Early Access to ADP Employment Data

Fed Governor Christopher Wallace on October 21, 2025 at the Fed’s Payment Innovation Conference (photo from federalreserve.gov)

The current partial shutdown of the federal government has delayed the release by the Bureau of Labor Statistics (BLS) of its “Employment Situation” report (often called the “jobs report”). The report had originally been scheduled to be released on October 3. In a recent blog post we discussed how well the employment data collected by the private payroll processing firm Automatic Data Processing (ADP) serves as an alternative measure of the state of the labor market. In that post we showed that ADP data on total private payroll employment tracks fairly well the BLS data on total private employment from its establishment survey (often called the payroll survey) .

An article in today’s Wall Street Journal reports that ADP has stopped providing the Fed with early access to its data. Apparently, as a public service ADP had been providing its data to the Fed a week before the data was publicly released. The article notes that ADP stopped providing the data soon after this speech delievered by Fed Governor Christopher Wallace in late August. In a footnote to the speech Wallace refers to “data that Federal Reserve staff maintains in collaboration with the employment services firm ADP.” The article points out, though, that Waller’s speech was only one of several times since 2019 that a Fed official has publicly mentioned receiving data from ADP.

Losing early access to the ADP data comes at a difficult time for the Fed, given that the BLS employment data are not available. In addition, the labor market has shown signs of weakening even though growth has remained strong in measures of output. If payroll employment has been falling, rather than growing slowly as it was in the August jobs report, that knowledge would affect the deliberations of the Fed’s policymaking Federal Open Market Committee (FOMC) at its next meeting on October 28–29. Serious deterioration in the labor market could lead the FOMC to cut its target for the federal funds rate by more than the expected 0.25 percentage point (25 basis points).

In a speech in 2019, Fed Chair Jerome Powell noted that the Fed staff had used ADP data to develop a new measure of payroll employment. Had that measure been available in 2008, Powell argued, the FOMC would have realized earlier than it did that employment was being severely affected by the deepening of the financial crisis:

“[I]n the first eight months of 2008, as the Great Recession was getting underway, the official monthly employment data showed total job losses of about 750,000. A later benchmark revision told a much bleaker story, with declines of about 1.5 million. Our new measure, had it been available in 2008, would have been much closer to the revised data, alerting us that the job situation might be considerably worse than the official data suggested.”

The Wall Street Journal article notes that Powell has urged ADP to resume sharing its employment data with the Fed.

No BLS Jobs Report Today. Are ADP’s Data a Good Substitute?

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Ordinarily, on the first Friday of a month the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report (often called the “jobs report”) containing data on the labor market for the previous month. There was no jobs report today (October 3) because of the federal government shutdown. (We discuss the shutdown in this blog post.)

Economists surveyed had forecast that today’s payroll survey would have shown a net increase of 51,000 jobs in September. When the shutdown ends, the BLS will publish its jobs report for September. Until that happens, employment data collected by the private payroll processing firm Automatic Data Processing (ADP) provides an alternative measure of the state of the labor market. ADP data covers only about 20 percent of total private nonfarm employment, but ADP attempts to make its data more consistent with BLS data by weighting its data to reflect the industry weights used in the BLS data.

How closely does ADP employment data track BLS payroll data? The following figure shows the ADP employment series (blue line) and the BLS payroll employment data (red line) with the values for both series set equal to 100 in January 2010. The two series track well with the exception of April and May 2020 during the worst of the pandemic. The BLS series shows a much larger decline in employment during those months than does the ADP series.

The next figure shows the 12-month percentage changes in the two series. Again, the series track fairly well except for the worst months of the pandemic and—strikingly—the month of April 2021 during the economic recovery. In that month, the ADP series increases by only 0.6 percent, while the BLS series soars by 13.1 percent.

Finally, economists, policymakers, and investors usually focus on the change in payroll employment from the previous month—that is, the net change in jobs—shown in the BLS jobs report. The following figure shows the net change in jobs in the two series, starting in January 2021 to avoid some of the largest fluctuations during the pandemic.

Again, the two series track fairly well, although the BLS data is more volatile. The ADP data show a net decline of 32,000 jobs in September. As noted earlier, economists surveyed were expecting a net increase of 51,000 jobs. During the months from May through August, BLS data show an average monthly net increase in jobs of only 39,250. So, whether the BLS number will turn out to be closer to the ADP number or to the number economists had forecast, the message would be the same: Since May, employment has grown only slowly. And, of course, as we’ve seen this year, whatever the BLS’s initial employment estimate for September turns out to be, it’s likely to be subject to significant revision in coming months. (We discuss why BLS revisions to its initial employment estimates can be substantial in this post.)

Where Did 911,000 Jobs Go?

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Today (September 9), the Bureau of Labor Statistics (BLS) issued revised estimates of the increase in employment, as measured by the establishment survey, over the period from April 2024 through March 2025. The BLS had initially estimated that during that period net employment had increased by a total of 1,758,000 or an average of 147,000 jobs per month. The revision lowered this estimate by more than half to a total of 839,000 jobs or an average of only 70,000 net new jobs created per month. The difference between those two monthly averages means that the U.S. economy had generated a total of 919,000 fewer jobs during that period. The revision was larger than the downward revision of 800,000 jobs forecast by economists at Wells Fargo, Comerica Bank, and Pantheon Macroeconomics.

Why does the BLS have to revise its employment estimates? As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1) the initial estimates that the BLS issues each month in its “Employment Situation” reports are based on a sample of 121,000 businesses and government agencies representing 631,000 worksites or “establishments.” The monthly data also rely on estimates of the number of employees at establishments that opened or closed during the month and on employment changes at establishments that failed to respond to the survey. In August or September of each year, the BLS issues revised employment estimates based on data from the Quarterly Census of Employment and Wages (QCEW), which relies on state unemployment insurance tax records. The unemployment tax records are much more comprehensive than the original sample of establishments because nearly all employers are included.

In today’s report, the BLS cited two likely sources of error in their preliminary estimates:

“First, businesses reported less employment to the QCEW than they reported to the CES survey (response error). Second, businesses who were selected for the CES survey but did not respond reported less employment to the QCEW than those businesses who did respond to the CES survey (nonresponse error).”

The preliminary benchmark estimates the BLS released today will be revised again and the final estimates for these months will be released in February 2026. The difference between the preliminary and final benchmark estimates can be substantial. For example, last year, the BLS’s initially preliminary benchmark estimate indicated that the net employment increase from April 2023 to March 2024 had been overestimated by 818,000 jobs. In February 2025, the final benchmark estimate reduced this number to 598,000 jobs.

Although this year’s revision is particularly large in absolute terms—the largest since at least 2001—it still represents only about 0.56 percent of the more than 159.5 million people employed in the U.S. economy. Still the size of this revision is likely to increase political criticism of the BLS.

How will this revision affect the decision by the Federal Open Market Committee (FOMC) at its next meeting on September 16-17 to cut or maintain its target for the federal funds rate? The members of the committee were probably not surprised by the downward revision in the employment estimates, although they may have anticipated that the revision would be smaller. In six of the past seven years, the BLS has revised its estimates of payroll employment downward in its annual preliminary benchmark revision.

As we noted in this recent post, even before the BLS revised its employment estimates downward, recent monthly net employment increases were well below the increases during the first half of the year. There was already a high likelihood that the FOMC intended to cut its target for the federal funds rate at its meeting on September 16–17. The substantial downward revision in the employment data makes a cut at the September meeting nearly a certainty and increases the likelihood that the FOMC will implement a second cut in its target for the federal funds rate at the committee’s meeting on October 28–29.

Weak Jobs Report Provides Further Evidence of Labor Market Softening

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This morning (September 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for August. The data in the report show that the labor market was weaker than expected in August.

According to the establishment survey, there was a net increase of only 22,000 nonfarm jobs during August. This increase was well below the increase of 110,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a smaller increase of 75,000 jobs. In addition, the BLS revised downward its previous estimates of employment in June and July by a combined 21,000 jobs. The estimate for June was revised from a net gain of 14,000 to a net loss of 13,000. This was the first month with a net job loss since December 2020. (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 from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure makes clear the striking deceleration in job growth since April. The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects.

The unemployment rate increased from 4.2 percent in July to 4.3 percent in August, the highest rate since October 2021. The unemployment rate is above the 4.2 percent rate economists surveyed by FactSet had forecast. As the following figure shows, the unemployment rate had been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month May 2024 to July 2025 before breaking out of that range in August. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate during the fourth quarter of 2025 would average 4.5 percent. The unemployment rate would still have to rise significantly for that forecast to be accurate.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 97,591 net new jobs each month to keep the unemployment rate stable at 4.3 percent. If this estimate is accurate, continuing monthly net job increases of 22,000 would result in a a rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 288,000 jobs in August, following a net decrease of 260,000 jobs in July. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent. as was the case this month with employment increasing much more in the household survey than in the employment survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In August the ratio rose to 80.7 percent from 8.4 percent in July. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The increase in the prime-age employment-population ratio is a bright spot in this month’s jobs report.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 15,000 in August and a total decline of 97,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has had a small effect on the overall labor market.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.7 percent in August, down from an increase of 3.9 percent in July.

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 wage 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. In August, the 1-month rate of wage inflation was 3.3 percent, down from 4.0 percent in July. This slowdown in wage growth may be another indication of a weakening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target for the federal funds rate? One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As we’ve noted in earlier blog posts, since the weak July jobs report, investors have assigned a very high probability to the committee cutting its target by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.50 percent at its September 16–17 meeting. This morning, as the following figure shows, investors raised the probability they assign to a 50 basis point reduction at the September meeting from 0 percent to 14.2 percent. Investors are also now assigning a 78.4 percent probability to the committee cutting its target range by at least an additional 25 basis points at its October 28–29 meeting.

In Jackson Hole Speech, Fed Chair Powell Signals a Rate Cut and Introduces the Fed’s Revised Monetary Policy Framework

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Federal Reserve chairs often take the opportunity of the Kansas City Fed’s annual monetary policy symposium held in Jackson Hole, Wyoming to provide a summary of their views on monetary policy and on the state of the economy. In these speeches, Fed chairs are careful not to preempt decisions of the Federal Open Market Committee (FOMC) by stating that policy changes will occur that the committee hasn’t yet agreed to. In his speech at Jackson Hole today (August 22), Powell came about as close as Fed chairs ever do to announcing a policy change in a speech. In addition, Powell announced changes to the Fed’s monetary policy framework that had been in place since 2020.

Congress has given the Federal Reserve a dual mandate to achieve price stability and maximum employment. To reach its goal of price stability, the Fed has set an inflation target of 2 percent, with inflation being measured by the percentage change in the personal consumption expenditures (PCE) price index. In the statement that the FOMC releases after each meeting, it generally indicates the current “balance of risks” to meeting its two goals. In a press conference on July 30 following the last meeting of the FOMC, Powell stated that while the labor market appeared to be in balance at close to maximum employment, inflation was still running above the Fed’s 2 percent annual target.

In today’s speech, Powell stated that “the balance of risks appears to be shifting” and “that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” These statements seem to signal that he expects that at its next meeting on September 16–17 the FOMC will cut its target for the federal funds rate from its current range of 4.25 percent to 4.50 percent.

One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) Yesterday, investors assigned a 75.0 percent probability to the committee cutting its target by 0.25 percentage point (25 basis points) to a range of 4.00 percent to 4.25 percent at its September meeting. After Powell’s speech at 10 a.m. eastern time, the probability of a 25 basis point cut increased to 85.3 percent. As the following figure from the Wall Street Journa shows, the stock market also jumped, with the S&P 500 stock index having increased about 1.5 percent at 2:00 p.m. Investors were presumably expecting that by cutting its federal funds rate target, the FOMC would help to offset some of the current weakness in the labor market. (We discussed the weakness in the latest jobs report in this blog post.)

Powell also announced that the Fed had revised its monetary policy framework, which had been in place since 2020. The previous framework was called flexible average-inflation targeting (FAIT). The policy was intended to automatically make monetary policy expansionary during recessions and contractionary during periods of unexpectedly high inflation. If households and firms accept that the Fed is following this policy, then during a recession when the inflation rate falls below the target, they would expect that the Fed would take action to increase the inflation rate. If a higher inflation rate results in a lower real interest rate, there will be an expansionary effect on the economy. Similarly, if the inflation rate were above the target, households and firms would expect future inflation rates to be lower, raising the real interest rate, which would have a contractionary effect on the economy.

An important point to note is that with a FAIT policy, after a period in which inflation is below 2%, the Fed would aim to keep inflation above 2% for a time to “make up” for the period of low inflation. But the converse would not be true—if inflation runs above 2%, the Fed would attempt to bring the inflation back to 2%, but would not push inflation below 2% for a time to make up for the period of low inflation. The result is that, on average, the economy would run “hotter,” lowering the average unemployment rate over time. Many policymakers at the Fed believed that, in the years before 2019, the unemployment could have been lower without causing the inflation rate to be persistently above the Fed’s target.

With hindsight, some economists and policymakers argue that FAIT was implemented at just the wrong time. The policy was designed to address the problem of inflation running below the 2% target for most of the period between 2012 and 2019, resulting in unemployment being higher than was consistent with the Fed’s mandate for maximum employment. But, in fact, as the following figure shows, in 2020 the U.S. economy was about to enter a period with the highest inflation rates since the early 1980s.

In his speech today, Powell noted that:

“The economic conditions that brought the policy rate to the ELB [effective lower bound to the federal funds rate, 0 percent to 0.25 percent] and drove the 2020 framework changes were thought to be rooted in slow-moving global factors that would persist for an extended period—and might well have done so, if not for the pandemic. … In the event, rather than low inflation and the ELB, the post-pandemic reopening brought the highest inflation in 40 years to economies around the world.”

Powell outlined the key changes in the policy framework:

“First, we removed language indicating that the ELB was a defining feature of the economic landscape. Instead, we noted that our ‘monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.'”

“Second, we returned to a framework of flexible inflation targeting and eliminated the ‘makeup’ strategy. As it turned out, the idea of an intentional, moderate inflation overshoot [after a period when inflation had been below the 2 percent annual target] had proved irrelevant. … Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate. It also notes that ‘price stability is essential for a sound and stable economy and supports the well-being of all Americans.’ “

“Third, our 2020 statement said that we would mitigate ‘shortfalls,’ rather than ‘deviations,’ from maximum employment. … [T]he use of ‘shortfalls’ was not intended as a commitment to permanently forswear preemption or to ignore labor market tightness. Accordingly, we removed ‘shortfalls’ from our statement. Instead, the revised document now states more precisely that ‘the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.’ … [But] preemptive action would likely be warranted if tightness in the labor market or other factors pose risks to price stability.”

“Fourth, consistent with the removal of ‘shortfalls,’ we made changes to clarify our approach in periods when our employment and inflation objectives are not complementary. In those circumstances, we will follow a balanced approach in promoting them.”

“Finally, the revised consensus statement retained our commitment to conduct a public review roughly every five years.”

To summarize, the two key changes in the framework are: 1) The FOMC will no longer attempt to push inflation beyond its 2 percent goal if inflation has been below that goal for a period, and 2) The FOMC may still attempt to preempt an increase in inflation if labor market conditions or other data make it appear likely that inflation will accelerate, but it won’t necessarily do so just because the unemployment rate is currently lower than what had been considered consistent with maximum employment.

Why Were the Data Revisions to Payroll Employment in May and June So Large?

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As we noted in yesterday’s blog post, the latest “Employment Situation” report from the Bureau of Labor Statistics (BLS) included very substantial downward revisions of the preliminary estimates of net employment increases for May and June. The previous estimates of net employment increases in these months were reduced by a combined 258,000 jobs. As a result, the BLS now estimates that employment increases for May and June totaled only 33,000, rather than the initially reported 291,000. According to Ernie Tedeschi, director of economics at the Budget Lab at Yale University, apart from April 2020, these were the largest downward revisions since at least 1979.

The size of the revisions combined with the estimate of an unexpectedly low net increase of only 73,000 jobs in June prompted President Donald Trump to take the unprecedented step of firing BLS Commissioner Erika McEntarfer. It’s worth noting that the BLS employment estimates are prepared by professional statisticians and economists and are presented to the commissioner only after they have been finalized. There is no evidence that political bias affects the employment estimates or other economic data prepared by federal statistical agencies.

Why were the revisions to the intial May and June estimates so large? The BLS states in each jobs report 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.” An article in the Wall Street Journal notes that: “Much of the revision to May and June payroll numbers was due to public schools, which employed 109,100 fewer people in June than BLS believed at the time.” The article also quotes Claire Mersol, an economist at the BLS as stating that: “Typically, the monthly revisions have offsetting movements within industries—one goes up, one goes down. In June, most revisions were negative.” In other words, the size of the revisions may have been due to chance.

Is it possible, though, that there was a more systematic error? As a number of people have commented, the initial response rate to the Current Employment Statistics (CES) survey has been declining over time. Can the declining response rate be the cause of larger errors in the preliminary job estimates?

In an article published earlier this year, economists Sylvain Leduc, Luiz Oliveira, and Caroline Paulson of the Federal Reserve Bank of San Francisco assessed this possibility. Figure 1 from their article illustrates the declining response rate by firms to the CES monthly survey. The figure shows that the response rate, which had been about 64 percent during 2013–2015, fell significantly during Covid, and has yet to return to its earlier levels. In March 2025, the response rate was only 42.6 percent.

The authors find, however, that at least through the end of 2024, the falling response rate doesn’t seem to have resulted in larger than normal revisions of the preliminary employment estimates. The following figure shows their calculation of the average monthly revision for each year beginning with 1990. (It’s important to note that they are showing the absolute values of the changes; that is, negative change are shown as positive changes.) Depite lower response rates, the revisions for the years 2022, 2023, and 2024 were close to the average for the earlier period from 1990 to 2019 when response rates to the CES were higher.

The weak employment numbers correspond to the period after the Trump administration announced large tariff increases on April 2. Larger firms tend to respond to the CES in a timely manner, while responses from smaller firms lag. We might expect that smaller firms would have been more likely to hesitate to expand employment following the tariff announcement. In that sense, it may be unsurprising that we have seen downward revisions of the prelimanary employment estimates for May and June as the BLS received more survey responses. In addition, as noted earlier, an overestimate of employment in local public schools alone accounts for about 40 percent of the downward revisions for those months. Finally, to consider another possibility, downward revisions of employment estimates are more likely when the economy is heading into, or has already entered, a recession. The following figure shows the very large revisisons to the establishment survey employment estimates during the 2007–2010 period.

At this point, we don’t fully know the reasons for the downward employment revisions announced yesterday, although it’s fair to say that they may have been politically the most consequential revisions in the history of the establishment survey.

Weaker Than Expected Jobs Report Shakes Up Investors’ Expectations of FOMC Rate Cuts

This morning (August 1), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for July. The data in the report show that the labor market was weaker than expected in July. There have been many stories in the media about firms becoming cautious in hiring as a result of the Trump administration’s tariff increases. Some large firms—including Microsoft, Walt Disney, Walmart, and Proctor and Gamble—have announced layoffs. In addition, real GDP growth slowed during the first half of the year. Nevertheless, until today it appeared that employment growth remained strong.

According to the establishment survey, there was a net increase of only 73,000 nonfarm jobs during July. This increase was below the increase of 1115,000 that economists surveyed by Factset had forecast. In addition, the BLS revised downward its previous estimates of employment in May and June by a combined 258,000 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.”) The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure shows the striking deceleration in job growth during the second quarter of this year.

The unemployment rate increased from 4.1 percent in June to 4.2 percent in July, which is the same rate as economists surveyed had forecast. As the following figure shows, the unemployment rate has been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month since May 2024. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.5 percent. The unemployment rate would have to rise significantly in the second half of the year for that forecast to be accurate.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 111,573 net new jobs each month to keep the unemployment rate stable at 4.2 percent. If this estimate is accurate, continuing monthly net job increases of 73,000 would result in a slowly rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 260,000 jobs in July, following an increase of 93,000 jobs in June. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other, which was the case this month. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In July the ratio declined to 80.4 percent from 80.7 percent in June. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to November 2019. Further declines in the prime-age employment-population ratio would be a strong indication of a softening labor market.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 12,000 in June and a total decline of 84,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has been too small to have a significant effect on the overall labor market.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.9 percent in July, up from an increase of 3.8 percent in June.

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 wage 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. In July, the 1-month rate of wage inflation was 4.0 percent, up from 3.0 percent in June. If the July rate of wage inflation is sustained, it would complicate the Fed’s task of achieving its 2 percent target rate of price inflation. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target for the federal funds rate? One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) Yesterday, as we noted in a blog post, investors assigned a 60.8 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at its September 16–17 meeting. As the following figure shows, there has been a sharp change in investors’ expectations. As of this morning, investors are assigning a 78.9 percent probability to the committee cutting its target by 0.25 percentage point (25 basis points) to a range of 4.00 percent to 4.25 percent.

There is a similarly dramatic change in investors’ expectations of the target range for the federal funds rate following the FOMC’s October 28–29 meeting. As the following figure shows, investors now assign a probability of 57.3 percent to the committee lowering its target range to 3.75 percent to 4.00 percent at that meeting. Yesterday, investors assigned a probability of only 13.7 percent to that outcome.

Surprisingly Strong Jobs Report

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This morning (July 3), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for June. The data in the report show that the labor market was stronger than expected in June. There have been many stories in the media about businesspeople becoming pessimistic as a result of the large tariff increases the Trump Administration announced on April 2—some of which have since been reduced—and some large firms—including Microsoft and Walt Disney—have announced layoffs. In addition, yesterday payroll processing firm ADP estimated that private sector employment had declined by 33,000 in June. But despite these signs of weakness in the labor market, as the headline in the Wall Street Journal put it “Hiring Defied Expectations in June.”

According to the establishment survey, there was a net increase of 147,000 nonfarm jobs during June. This increase was above the increase of 1115,000 that economists surveyed had forecast. In addition, the BLS revised upward its previous estimates of employment in April and May by a combined 16,000 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.”) The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years.

The unemployment rate declined from 4.2 in May to 4.1 percent in June. Economists surveyed had forecast an increase in the unemployment rate to 4.3 percent. As the following figure shows, the unemployment rate has been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month since May 2024. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.5 percent. The unemployment rate would have to rise significantly in the second half of the year for that forecast to be accurate.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 113,500 net new jobs each month to keep the unemployment rate stable at 4.1 percent.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 93,000 jobs in June, following a decrease of 696,000 jobs in May. As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent with employment increasing in one survey while falling in the other. This month, the two surveys were consistent in both showing a net increase in employment. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator. The employment-population ratio for prime age workers—those aged 25 to 54—rose from 80.5 percent in May to 80.7 percent in June. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is above what the ratio was in any month during the period from January 2008 to January 2020.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in total federal government employment of 7,000 in June and a total decline of 69,000 since the beginning of February. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has been too small to have a significant effect on the overall labor market.

The establishment survey also includes data on average hourly earnings (AHE). As we noted 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 of being 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. The AHE increased 3.7 percent in June, down from an increase of 3.8 percent in May.

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 wage 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. In June, the 1-month rate of wage inflation was 2.7 percent, down significantly from 4.8 percent in May. If the 1-month increase in AHE is sustained, it would indicate that the Fed may have an easier time achieving its 2 percent target rate of price inflation. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

Before today’s jobs reports the signs that the labor market was weakening, which we discussed earlier, had led some economists and policymakers to speculate that a weak jobs report would lead the FOMC to cut its target range for the federal funds rate at its next meeting on July 29–30. That now seems very unlikely.