Job growth revised down by a lot, makes Fed delay in rate cuts look worse

Wednesday morning, the US Bureau of Labor Statistics released the newest update of the “gold standard” Quarterly Census of Employment and Wages (QCEW), taking us through the 1st Quarter of 2024. This report said that overall jobs in the US grew by 1.3% between March 2023 and March 2024. Taken in isolation, this means that growth was decent, but nothing special.

However, the 1st Quarter QCEW numbers also are accompanied with preliminary revisions of the monthly job reports that grab the headlines when they come out. And that news was concerning, since it says job growth wasn’t nearly as good as what was first reported in those monthly reports.

Each year, the Current Employment Statistics (CES) survey employment estimates are benchmarked to comprehensive counts of employment for the month of March. These counts are derived from state unemployment insurance (UI) tax records that nearly all employers are required to file. For National CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus one-tenth of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates an adjustment to March 2024 total nonfarm employment of -818,000 (-0.5 percent).

Preliminary benchmark revisions are calculated only for the month of March 2024 for the major industry sectors in table 1. The existing employment series are not updated with the release of the preliminary benchmark estimate. The data for all CES series will be updated when the final benchmark revision is issued.

Breaking it down by month, you can see that the bigger monthly revisions will likely come with the second half of 2023, as 12-month job growth was closer to 1.5% than the 2%+ rate that was originally reported.

The financial media especially took note of this, because the booming job growth that was being reported in late 2023 and early 2024 (something I was guilty of touting at the time) has now been reduced to just over 2 million for the 12 months between March 2023 and March 2024.

Now let's take a step back and admit that 2 million jobs added and a 1.3% rate of growth is still pretty good, especially when we consider unemployment was at 3.5% in March 2023, so there was only so much more we could have grown. It’s no different as the 12-month rate and amount of job gains that we saw in 2019 and pre-COVID 2020 under Donald Trump, when we had a similarly low level of unemployment, and just below what we did in 2018.

But the difference is that when job growth slowed down in a full-employment situation in 2019 (as shown by the red line), the Federal Reserve caved to Donald Trump and began cutting the Fed Funds rate that Summer from a not-that-high 2.25%-2.5% down to 1.5%-1.75%. Those 3 rate cuts happened before we even knew COVID-19 was a thing.

In 2024, despite clear signs that job growth, inflation, and nominal wage growth have been going lower, the Fed has refused to cut interest rates from a level that is more than double where we were in 2019. The economic situation isn’t much different than what it was 5 years ago, except that in 2024 unemployment has been slowly rising in the last few months (albeit still low at 4.3%), unlike 2019, when the unemployment rate stayed below 4% all year.

The downward revisions in job growth means that the Fed is even more behind the curve on reducing these punitive interest rates than we first thought, which fed even more speculation on Wall Street as to how fast and how much the Fed will cut starting in September.

Then the Fed released the minutes of their last Open Markets Committee meeting from 3 weeks ago, which gave insights as to what they felt was the economic situation, and why they chose not to start cutting rates. In reading those minutes, it looks committee members at the Fed acknowledged that things had slowed down, with some members wanting a cut last month, but they were outnumbered by the rest of the FOMC, and held off for another 6 weeks.

In their consideration of monetary policy at this meeting, participants observed that recent indicators suggested that economic activity had continued to expand at a solid pace, job gains had moderated, and the unemployment rate had moved up but remained low. While inflation remained somewhat above the Committee's longer-run goal of 2 percent, participants noted that inflation had eased over the past year and that recent incoming data indicated some further progress toward the Committee's objective. All participants supported maintaining the target range for the federal funds rate at 5-1/4 to 5-1/2 percent, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision. Participants furthermore judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings.

In discussing the outlook for monetary policy, participants noted that growth in economic activity had been solid, there had been some further progress on inflation, and conditions in the labor market had eased. Almost all participants remarked that while the incoming data regarding inflation were encouraging, additional information was needed to provide greater confidence that inflation was moving sustainably toward the Committee's 2 percent objective before it would be appropriate to lower the target range for the federal funds rate. Nevertheless, participants viewed the incoming data as enhancing their confidence that inflation was moving toward the Committee's objective. The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting. Many participants commented that monetary policy continued to be restrictive, although they expressed a range of views about the degree of restrictiveness, and a few participants noted that ongoing disinflation, with no change in the nominal target range for the policy rate, by itself results in a tightening in monetary policy. Most participants remarked on the importance of communicating the Committee's data-dependent approach and emphasized, in particular, that monetary policy decisions are conditional on the evolution of the economy rather than being on a preset path or that those decisions depend on the totality of the incoming data rather than on any particular data point. Several participants stressed the need to monitor conditions in money markets and factors affecting the demand for reserves amid the ongoing reduction in the Federal Reserve's balance sheet.

In discussing risk-management considerations that could bear on the outlook for monetary policy, participants highlighted uncertainties affecting the outlook, such as those regarding the amount of restraint currently provided by monetary policy, the lags with which past and current restraint have affected and will affect economic activity, and the degree of normalization of the economy following disruptions associated with the pandemic. A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased. Some participants noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration. Many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment. A couple participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way. Several participants remarked that reducing policy restraint too soon or too much could risk a resurgence in aggregate demand and a reversal of the progress on inflation. These participants pointed to risks related to potential shocks that could put upward pressure on inflation or the possibility that inflation could prove more persistent than currently expected.

Now what if the Fed knew that the number of jobs in America was quite a bit less than what was being reported at the time? I got a feeling they would have cut, to the relief of many Americans and businesses. Even with the data that we had at the time, it made little sense to me why the Fed wasn't cutting earlier this year.

Data for July that has come out since that Fed meeting include a disappointing jobs report, tame inflation figures, and a significant drop in housing starts. All of these items support a move to lower interest rates.

So now the question becomes whether the decision-makers at the Fed have to catch up to the interest rate cut that they should have made 3 weeks ago, and put in a cut of 50 basis points in mid-September. It would be a drastic move, but given that the new data indicates the Fed made the wrong choice in July based on what the economic situation dictated, it would only be fair if they doubled a 25-point cut to make up for it.