Where did the jobs go
As the financial world keenly observes the Jackson Hole Economic Symposium for clues about the future of monetary policy, another critical event looms on the horizon: the BLS's Annual Benchmark revisions. While perhaps less captivating than a gathering of central bankers, these revisions hold the potential to shed light on a perplexing puzzle: if payrolls have been so robust over the past year, why has US employment growth been so lacklustre?
We've long observed a curious divergence between nonfarm payroll job gains and actual employment levels. From September 2020 to early 2022, these two measures moved in tandem. However, around March 2022, they began to part ways. The past 12 months have seen strong payrolls with an average of 209k new jobs added per month, totalling a healthy 2.51 million. Yet, over the same period, the employment level has barely budged, increasing by a mere 57,000. Even more concerning is the decline in full-time employment, which has dropped by 508,000.
The BLS relies on surveys and models to estimate economic data, but these estimates are often based on samples and can be subject to lags and revisions. Benchmark revisions, incorporating more comprehensive data sources, provide a more accurate historical record, although they can lead to significant changes in previously published figures. The 2023 benchmark revision, for example, resulted in a downward adjustment of nearly 500,000 jobs.
While the BLS rarely provides explanations for its revisions, one likely culprit behind the payroll-employment discrepancy is the birth/death model used to estimate job creation from new businesses. This model relies on historical trends and can be less reliable at economic turning points.
This is why we prioritise the unemployment rate, which is unaffected by these statistical adjustments. The recent surge in unemployment has triggered the Sahm rule (a simple but effective recession indicator that looks for a 0.5 percentage point increase in the three-month average unemployment rate from its recent low), suggesting a possible recession - a stark contrast to the more rosy picture painted by payroll numbers alone. Tomorrow's BLS revisions may finally offer some clarity on this divergence. While the birth/death model may not be the sole culprit, the report could have significant implications for our understanding of the true state of the US labour market.
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