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Revisions to previously released jobs numbers have become increasingly common in recent years, but this week, investors and economists witnessed the largest revision to U.S. payroll data since 2009, just after the Global Financial Crisis.\u00a0<\/p>\n
The U.S. economy added 818,000 fewer jobs than previously reported between March 2023 and March 2024, the Bureau of Labor Statistics revealed<\/a> Wednesday. Still, despite the ugly data, which led to concerns among some investors about a weakening labor market, the stock market reaction was muted. The Dow<\/a> Jones Industrial Average rose 0.4% by 2pm ET on Wednesday, while the S&P 500 and the tech-heavy Nasdaq<\/a> Composite jumped 0.33% and 0.45%, respectively.<\/p>\n Brian Albrecht, chief economist at the International Center for Law and Economics, said he\u2019s not surprised by the lack of market movement \u201cIt\u2019s a big revision, but we expected a big revision,\u201d he told Fortune<\/em>. \u201cPrivate forecasters were putting out numbers\u2014anything from 350,000, up to a million\u2014and this is on the upper side of it, but we expected it to be on the high side, which is why we had a bunch of coverage on it before it even came out.\u201d<\/p>\n To Albrecht\u2019s point, investors widely anticipated a large negative revision to payroll growth on Wednesday, with some fearing an even more dramatic 1 million reduction in jobs between March 2023 and March 2024, as Fortune<\/em> previously reported<\/a>.<\/p>\n Eric Wallerstein, chief markets strategist at Yardeni Research, echoed Albrecht\u2019s somewhat sanguine view as well. \u201cThe market\u2019s lack of reaction is pretty telling,\u201d he said. \u201cI think the revisions, you can say, they were priced in. We were kind of expecting some sort of big revision\u2026It\u2019s kind of a nothing burger.\u201d<\/p>\n Wallerstein noted that the negative revision to payrolls only dropped monthly payroll growth over the period in question from 241,000 additions per month to 174,000 per month. \u201cThat\u2019s 2018, 2019 average monthly payroll growth,\u201d he said. \u201cSo we\u2019re not really sweating this one.\u201d<\/p>\n Another reason investors may be brushing off signs of labor market weakness is that said weakness may only serve to increase the odds of more aggressive interest rate cuts from the Federal Reserve moving forward.<\/p>\n The Fed raised interest rates from near-zero in March 2022 to a range between 5.25% and 5.5%, and has held them at that level for over a year. But inflation is now fading, and investors have long been predicting interest rate cuts. Wednesday\u2019s large negative revision to past payroll data helped reinforce that outlook, at least slightly. Bond market traders are now pricing in a 32.5% chance of an outsized 50 basis point rate cut in September, up from 22.5% on Monday, according to CME Group\u2019s FedWatch Tool<\/a>.<\/p>\n Still, most experts argued the impact of the recent payroll revision will be minimal for the Fed, since the data is so backward looking.\u00a0<\/p>\n \u201cThe Fed\u2019s labor market concerns stem from the weakness in job growth from [the second quarter] onwards, combined with deterioration in other indicators. It won\u2019t be spooked by news that the labor market was \u2018solid\u2019 rather than \u2018strong\u2019 last year. Bank of America\u2019s U.S. economist Aditya Bhave wrote in a Wednesday note, arguing that even the change in investors\u2019 expectations of rate cuts has been \u201cminimal.\u201d<\/p>\n Albrecht backed up that view. \u201cThe [Fed] governors know this stuff, and the voting members know this stuff,\u201d he said. \u201cSo it shouldn\u2019t change too much.\u201d<\/p>\n Finally, Wallerstein said that even if upcoming jobs data takes a turn for the worse, which he doesn\u2019t expect, the Fed will have room to play hero\u2014meaning investors should think twice about selling stocks. \u201cDo you sell stocks, because you think: \u2018oh, no, the economy is unduly weak?\u2019\u201d he asked rhetorically, answering: \u201cI don\u2019t know, the Federal will rush in to save the day, they have an easing bias generally when things go wrong\u2026the Fed Put<\/a> lives.\u201d<\/p>\n Another reason for the muted market reaction to the largest negative revision to payroll data in roughly 15 years is the \u201c\u2018why\u201d behind the revision.\u00a0<\/p>\n Albrecht explained that there are always common errors that can occur when the Bureau of Labor Statics (BLS) reaches out to businesses for employment data. \u201cThey don\u2019t get every establishment, and so they get some sampling error,\u201d he said, noting that \u201csometimes they get HR folks who do a really good job; sometimes they don\u2019t. Sometimes they send [the payroll survey] back; sometimes they don\u2019t.\u201d<\/p>\n And beyond that, there is a unique, and likely temporary, issue with something called the Current Employment Statistics Net Birth-Death Model<\/a> that has thrown off labor market data of late. This model is made to account for what the BLS calls \u201can unavoidable lag\u201d between the opening of a new business and its appearance in payroll sampling data.\u00a0<\/p>\n The issue is, over the past few years, the number of new businesses opening in the U.S. has surged dramatically\u2014particularly in 2023, when a record 5,481,437 new businesses were created, according to U.S. Census Bureau data<\/a>. This surge in new business creation was taken into account by the Net Birth-Death Model, and then extrapolated into an ongoing surge in new business formations which hasn\u2019t arrived.<\/p>\n \u201cThe model overestimated based on a big jump in new business formation from the year before,\u201d Albrecht explained. \u201cIt turns out that that was overly optimistic. Business formation still is up, but it skyrocketed and then flattened out.\u201d<\/p>\n The good news, according to Albrecht, is that this sampling issue may soon be a thing of the past, because we have settled into a more \u201csteady state\u201d of business births and deaths.<\/p>\n \u201cThis revision was huge, yes, but we shouldn\u2019t expect some big change next year in the revision, because the big reason for the revision\u2014the kind of the mess up of the birth-death model\u2014shouldn\u2019t be there anymore,\u201d he said.<\/p>\n There\u2019s one final caveat to Wednesday\u2019s, admittedly initially frightening, negative revision to previous payroll data: the impact of undocumented immigration. Yardeni Research\u2019s Wallerstein pointed out that the BLS often struggles to measure the number of jobs that undocumented workers have managed to land, which can throw off payroll figures.\u00a0<\/p>\n Using some back of the napkin math, based on the Congressional Budget Office\u2019s data<\/a> on the recent surge in immigration to the U.S., Wallerstein estimated that roughly 500,000 workers could be missing from the payroll data between March 2023 and March 2024.<\/p>\n \u201cThat gets us back to almost what we were at pre-revision,\u201d he said. \u201cSo I still think immigration is a big deal.\u201d<\/p>\n<\/div>\nWhy was there such a big revision to past jobs numbers?<\/h2>\n
Another caveat worth mentioning<\/h2>\n