The Big Downward Revision
On Tuesday, we received the preliminary estimate of the Current Employment Statistics national benchmark revision, part of the Bureau of Labor Statistics’ annual review of its previously published employment data.The preliminary estimate is that, from March 2024 to March 2025, there were 911,000 fewer jobs than originally reported. This downward revision means that nonfarm employment was 0.6% lower. Over the last 10 years, the revision has averaged plus or minus 0.2%, so this data deviated from the historical norm in a meaningful way.
Markets held relatively steady in response to the news because it was largely expected. This report confirmed the thesis that the labor market has been weaker under the surface than the data has been signaling, paving the way for the Fed to take action and resume cutting interest rates at its meeting next week.
Less jobs certainly spells stress for the economy, but Don Rissmiller, Chief Economist at Strategas Research Partners, asked an interesting question in a recent research note.
“There has been a string of large negative revisions to prior U.S. payrolls. But corporate earnings are what they are, with strict financial penalties for misreporting. The gains in S&P earnings & NIPA profits over the past several years occurred with fewer U.S. workers than previously reported. That combination would be consistent with trend productivity starting to improve (i.e., the tech capex story may be starting to work). So past U.S. growth was accomplished with notably fewer employees – is that a bad thing?”
How the Monthly Jobs Report is Calculated
Intended to show data in real time, the monthly employment reports from the BLS are comprised by collecting data from surveys of businesses across the country and then applying statistical analysis to land on the current employment statistics.Any data model of this magnitude requires a significant input of survey responses to refine the ultimate output.
As we’ve noted in the past, survey responses have been trending downward since the pandemic. The response rate is near 43% today, coming off an average of 60% before the pandemic. This means that a higher tolerance for errors is necessary when reviewing the outputs.
Another component that has caused trouble for the survey is the “birth-death” model, a variable within the statistical model attempting to adjust for the fact that over any given period, some companies will go out of business while some companies will be started. Again, this has been a challenging area to forecast accurately.
August CI Meets Expectations
On Thursday, we received the latest inflation report from the BLS. The Consumer Price Index (CPI) increased year-over-year from 2.7% in July to 2.9% in August, which was in line with market expectations. Energy prices picked up during the month, increasing 0.7%. Shelter costs rose from 0.2% to 0.4%, and food from 0% to 0.5%.CPI coming in as expected kept overall market volatility muted after the release, though the effects of global trade policy remain difficult to decipher in real time.
Let’s look at how the market reacted to this data. As of Thursday’s close, the market registered a 93.9% chance of a 0.25% interest rate cut at the upcoming Fed meeting. The 10-year Treasury also rallied this week, closing on Thursday at a 4.01% yield.
The market is anticipating that the Fed will stay true to its recent messaging that the balance of risk has shifted more towards needing accommodative policy to support the labor market instead of restrictive policy to combat inflation.
After the downward jobs revision, we’ve even seen a small camp forecast that the Fed will cut by 0.50% next week. We don’t think this is the base case, but we observe that the market believes the Fed is set to begin a move towards more accommodative policy as we close out 2025.
Powell’s press conference next week will serve as a unique moment. The data on its own clearly suggests that the Fed should be more accommodative. Powell’s job will be to communicate this rationale while also avoiding the appearance that he is conceding to pressure from the Trump administration. Expect every word of Powell’s speech to be dissected, and we’ll keep everyone updated on our thoughts after the Fed’s decision and press conference next week.
