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A Slightly Better Than Expected Jobs Report

An image generated by GTP-4o of people going to work.

The Federal Reserve’s policymaking Federal Open Market Committee (FOMC) has its next meeting on December 17-18. Although the committee is expected to lower its target range for the federal funds rate at that meeting, some members of the committee have been concerned that inflation has remained above the committee’s 2 percent annual target. For instance, in an interview on December 4, Fed Chair Jerome Powell said: “Growth is definitely stronger than we thought, and inflation is coming a little higher. The good news is that we can afford to be a little more cautious as we try to find [the] neutral [federal funds rate].”

This morning (December 6), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for November. The report provided data indicating that the labor market remained strong—perhaps stronger than is consistent with the FOMC being willing to rapidly cut its federal funds rate target. The data in the October report (which we discussed in this blog post) were distorted by the effects of hurricanes and strikes. Today’s report indicated a bounce back in the labor market as many workers in areas affected by hurricanes returned to work and key strikes ended.

Economists who had been surveyed by the Wall Street Journal had forecast that payroll employment, as reported in the establishment survey, would increase by 214,000. The BLS reported that payroll employment in November had increased by 227,000, slightly above expectations. The unemployment rate—which is calculated from data in the household survey—was 4.2 percent, up slightly from 4.1 percent in October. In addition, the BLS revised upward its estimates of the employment increases in September and October by a total of 56,000. (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.

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 November was a decline of 355,000 jobs following a decline of 368,000 jobs in October. So, the story told by the two surveys is somewhat at odds, with a solid employment gain in the establishment survey contrasted with a significant employment decline in the household survey. (In this blog post, we discuss the differences between the employment estimates in the household survey and the employment estimates in the establishment survey.)

The employment-population ratio for prime age workers—those aged 25 to 54—also declined, as shown in the following figure, to 80.4 percent in November from 80.6 percent in October. Although this was the second consecutive month of decline, the employment-population ratio remained high relative to levels seen since 2001.

As the following figure shows, the unemployment rate, which is also reported in the household survey, increased slightly to 4.2 percent in November from 4.1 percent in October. The unemployment is still below its recent high of 4.3 percent in July.

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 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. The AHE increased 4.0 percent in November, the same as 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.
The November 1-month rate of wage inflation was 4.5 percent, a decline from the 5.2 percent rate in October. Whether measured as a 12-month increase or as a 1-month increase, AHE is still increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

Given these data from the jobs report, is it likely that the FOMC will reduce its target range for the federal funds rate at its next 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 88.8 percent to the FOMC cutting its target range for the federal funds rate by 0.25 percentage point (25 basis points) from the current range of 4.50 percent to 4.75 percent, at its next meeting. Investors assign a probability of only 11.2 percent of the committee leaving its target range unchanged.

What do investors expect will happen at the next FOMC meeting after the December 17-18 meeting, which will occur on January 28-29, 2025? As of today, investors assing a probability of only 26.5 percent that the committee will set its target range at 4.00 percent to 4.25 percent, or 50 basis points, below the current target. In other words, only a minority of investors are expecting the committee to cut its target range at both its December and January meetings.

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.

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.