Where Did the 818k Jobs Go?
Earlier this week, we posed the question: "Where did the jobs go?" Yesterday, the Bureau of Labor Statistics (BLS) offered an answer, albeit an unsettling one. They admitted to an error in their estimates, revealing that the "true" payroll number for the year ending March 2024 was a staggering 818,000 less than previously reported.
The whereabouts of these missing jobs remains shrouded in uncertainty, a mystery even the BLS can't unravel. However, the most likely explanation points towards the birth/death model as the culprit. This statistical tool, employed by the BLS to estimate job creation or loss from new business formations and closures, is a crucial component of the Current Employment Statistics (CES) survey.
However, the CES survey's reliance on sampling established businesses inherently overlooks job fluctuations stemming from newly formed or recently closed enterprises. The birth/death model strives to bridge this gap, but the COVID-19 pandemic has dramatically disrupted business dynamics, making its application more complex than ever.
The surge in business formations during the pandemic and the subsequent unpredictable patterns have thrown off the statistical relationships and trends that the birth/death model relies upon. This could lead to significant inaccuracies in the BLS's job estimates, potentially overestimating job growth during economic slowdowns and underestimating it during periods of improvement.
The implications of these revelations are far-reaching. Since the BLS cannot pinpoint the source of the errors, the payroll data will be adjusted by a flat 68,000 per month for the period ending March 2024. This casts a shadow over July's already weak jobs report, suggesting the "true" number was much worse.
The trend of increasing errors over time adds another layer of complexity. While we cannot simply subtract 68,000 from July's payrolls, it is highly probable that next year's BLS revisions will reveal a much larger adjustment. Even an adjustment of 68,000 would bring July's NFP reading down to a mere 46,000, well below the rate needed to prevent a rise in unemployment.
The Federal Reserve is not oblivious to the overstatement of job numbers. In last year's Jackson Hole speech, Powell acknowledged the potential for inflated job growth figures due to the intricacies of the birth/death model amid the pandemic's disruptions.
Expect this year's speech to reiterate this concern. The new data provides the Fed with ample justification for rate cuts, perhaps as much as 50 basis points in September, especially if inflation continues its downward trajectory. The missing jobs, it seems, may pave the way for significant changes in US monetary policy.
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