Benchmark NFP Revisions of Limited Economic Importance

Summary

• The preliminary estimate of the annual benchmark revisions to the nonfarm payrolls (NFPs) was negative and large.
• This could reflect a bias in the Bureau of Labor Statistics’ (BLS’s) forecast of job flows associated with business births and deaths.
• Because they are based on unemployment insurance, the benchmark revisions are likely to miss the substantial increase in undocumented immigration over the past two years.
• The BLS stats quality has limited bearing on actual growth, which will likely remain strong into year end.

Market Implications

• I still expect the Federal Reserve (Fed) to cut in September.

Benchmarked Down

Every year, the BLS publishes an in-depth, benchmark revision of its NFP estimates. The preliminary revision estimate published last week was negative and exceptionally large. In this note, I argue it does not spell doom and gloom for the economy.

The BLS benchmarks NFP estimates based on the March unemployment insurance (UI) tax records that cover about 95% of US establishments (monthly NFPs cover only about one third). The revisions involve five years of seasonally adjusted (SA) data and 21 months of non-SA data. The revisions are published in February alongside the January NFP.

The first estimate of the 2024 benchmark revision was released last week and showed NFPs in the year through March were 818,000 lower than current estimates. The benchmark revision is based largely but not entirely on the Quarterly Census of Employment and Wages (QCEW), which showed an even larger downward revision (958,000).

The preliminary revision implies that in the year to March 2024, average monthly NFP was 178,000 rather than 246,000 per the current NFP data (the revision is not seasonally adjusted).

The preliminary revision was an outlier (Chart 1). In percent of the workforce, revisions have only been larger (in negative terms) in 2009 and 1991 (periods of economic dislocation). It seems very likely that, like most extreme data points, this estimate will be revised down.

Yet the final revisions could remain substantial, not least due to the BLS’s birth/death model.

Birth /Death Model Overestimates NFP

In 2003, the Current Employment Statistics (CES) survey, from which the NFP derives, switched to probability-based (random) sampling from quota-based sampling (based on pre-set characteristics). The CES survey also tried addressing a key deficiency of quota sampling: a lack of timely accounting for business births and deaths (BD).

The CES BD model involves two steps. First, businesses that have closed or not responded to the survey are assigned an employment growth equal to that of the average for the survey respondents. This is mainly because new businesses’ job creation tends to track dead businesses’ job contraction (Chart 2).

The second step involves extrapolating the past difference between actual birth and death employment and the imputation in the first step to predict the current period’s B/D.

The CES BD forecasts tend to track the data on actual job flows from opening and closing businesses in the Business Employment Dynamics (Chart 3). However, since 2022 the series have decoupled. Atlanta Fed economists estimate the BD model overestimated NFP growth 440,000 during April 2023-June 2024.

The benchmark revisions are likely to pick up this overstatement. Since those are based on UI records, however, they are likely to miss the substantial increase in unrecorded immigration since 2022.

Benchmark Revisions Missing Undocumented Migrants

In January, the Congressional Budget Office (CBO) raised its estimates of recent net immigration, including of migrants in the category ‘other foreign nationals’ (Table 1, see my analysis of immigration and inflation here).

The CBO ‘other foreign nationals’ category includes:

1. Those who entered the United States illegally and have not obtained a permanent legal status.
2. Those who were permitted to enter the country lawfully through the parole authority and who may be awaiting proceedings in immigration court.
3. Those who previously resided in the United States legally in a temporary status but who remained in the country after that legal status expired.

Migrants in category two can apply for a work permit and work legally. However, migrants in categories one and three are working illegally and therefore unlikely to contribute to UI and be counted in the benchmark revisions.

The CBO has stressed the high uncertainty surrounding its demographic estimates.  Nevertheless, signs exist of a substantial increase in undocumented migrants. For instance, most of the recent increase in unemployment has been in uninsured unemployment (Chart 4).

Unrecorded immigration is also apparent in the growing and unprecedented disconnect between NFP and household (HH) survey employment. HH survey employment is obtained by applying the survey ratios to estimates of the civilian population prepared by the Census Bureau. Because the Census Bureau has not considered immigration when estimating the civilian population, the HH survey undercounts employment (Chart 5).

BLS Stats Quality of Limited Economic Importance

NFPs go through multiple revisions. These tend to zero on average, except around periods of economic dislocation. For instance, revisions were large and positive during 2021-22 (Chart 6). Since then, they have tended to be negative but small on average.

The forthcoming benchmark revision is likely to be negative, especially since it does not consider illegal immigration. However, I think this should not change the broad macro picture much. Outside of NFP, labour market indicators signal resiliency. I expect the August NFP to confirm the July weakness as weather related.

Also, broader economic indicators indicate an economy growing at or above trend. For instance, the Atlanta Fed GDP nowcast.

Lastly, fiscal policy is on autopilot until next year while the Fed is about to start easing.

Market Implications

I still expect the Fed to cut next month.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)