September non-farm payrolls may see another "significant downward revision". Will this open the door for a "50 basis point interest rate cut"?

The U.S. employment data may be facing another significant downward revision, paving the way for a 50 basis point rate cut in September. On September 9, the U.S. Department of Labor (BLS) will release the annual benchmark revision of nonfarm employment data. According to calculations by Goldman Sachs, Standard Chartered Bank, and others, this may result in a significant "employment correction" of as much as 550,000 to 800,000 jobs, directly impacting market confidence in the U.S. labor market and possibly prompting the Federal Reserve to make a 50 basis point rate cut similar to last September. There are two main reasons for the significant downward revision of the data. One is that the birth-death model is distorted, overestimating the employment created by new businesses. The other reason is a significant decrease in illegal immigrants, leading to a systematic overestimation of the labor force population. It is estimated that these deviations may have led to an overestimation of actual employment by 40,000 to 70,000 people per month, equivalent to a cumulative inflated number of 550,000 to 800,000 jobs per year. The significance behind this is immense, as senior traders at Goldman Sachs have stated that what now determines the pace for Jerome Powell is not inflation, but employment. If this revision is similar to last September (when BLS also revised down 800,000 jobs and the Federal Reserve promptly made a large 50 basis point rate cut), Powell may once again face the decision of whether to make a one-time 50 basis point rate cut, even if just to "clear his name" last year's rate cut was not a political compromise, but based on real economic slowdown. Standard Chartered Bank estimates that BLS's reported NFP is inflated by 70,000 jobs per month Goldman Sachs points out that the main source of distortion in the employment data is the longstanding use of the "birth-death model" by BLS. This model is used to estimate the number of jobs created by new businesses, but it is not based on actual business registration or tax data. Instead, it is a model estimate, which makes it prone to systematic overestimation of employment growth. In contrast, QCEW (Quarterly Census of Employment and Wages) and BDM (Business Employment Dynamics) are based on actual records of unemployment insurance payments by companies and are considered a more reliable "gold standard." Using its own model and combining BED data with more frequent information on business dynamics, Goldman Sachs has found that the BLS model has indeed overestimated employment growth by an average of 45,000 jobs per month in the second half of 2024. Although BLS has made slight adjustments to the model parameters in recent months and has reflected a stabilization in the number of new businesses opening, the deviation is still significant. Steven Englander of Standard Chartered Bank referred to the birth-death model as a "fig leaf for the data." He estimates that BLS's reported NFP is inflated by 70,000 jobs per month. According to his analysis, from early 2024 to present, established companies have only added 25,000 jobs per month, while BLS estimates that "new companies" contribute over 100,000 jobs per month. However, BDM data shows that new companies actually contribute only 20% of all new jobs, far below the BLS assumption. Even more concerning is that in 2024, the number of jobs created by newly established companies is less than 20% of that in 2022. If the model were to reflect this reality, the NFP would be revised down by at least 70,000 jobs per month. Englander further points out that to maintain basic equilibrium in the labor market, the "reasonable level" of nonfarm employment data should be 170,000 jobs per month, with 100,000 coming from natural growth and 70,000 representing the overestimated portion by the model. It is worth noting that BDM, although lagging behind (latest data only available until 2024), is, like QCEW, the data foundation used by the U.S. Department of Labor for the annual benchmark revision. The authority of these data far exceeds the nonfarm employment data based on sampling. The employment benchmark revision that BLS will release on September 9 is based on this data. Once corrected based on the real trends reflected in the BDM, nonfarm employment may be revised down by 550,000 to 800,000 at once, causing significant impacts on market confidence and policy outlook. Five signals: Signs of overstated employment data have been evident Goldman Sachs points out that, in addition to the birth-death model causing overestimation, there are at least five additional reasons that indicate serious problems with the data. 1. Decline in illegal immigration Goldman Sachs estimates that the number of illegal immigrants has significantly decreased in recent months. Illegal immigrants have a significant impact on labor supply. The "immigration wave" from 2022 to 2024 led to a surge in employment demand, but with the slowdown in immigration, the actual need for new jobs has also decreased. If BLS continues to estimate employment demand based on old immigration assumptions, it would clearly be too high. 2. Seasonal adjustment models may misjudge trends Seasonal adjustment models often mistake changes in real trends as seasonal fluctuations at first. Only when it is confirmed that the trend has indeed deteriorated will the model go back to downwardly revise the previous data. 3. Historically, initial employment data is often later revised downward during economic slowdowns Historical experience shows that during periods of economic slowdown, initial employment data is often revised downward later on. This phenomenon has occurred with every economic recession since 1979 (except one). 4. ADP questions BLS's exaggeration of the healthcare industry As a major provider of wage data in the United States, ADP's data shows that employment growth in the healthcare industry is not as strong as reported by BLS. In the past three months, the healthcare industry has accounted for more than all of the nonfarm job growth. Both ADP and industry analysts believe that the reality is not as exaggerated as BLS claims, and the true situation may be somewhere between the two. 5. Household surveys overestimate immigration and employment Household surveys may currently overestimate the growth of the U.S. population and the number of employed individuals. This is because the immigration estimates used at the beginning of the year were originally reasonable, but have since been significantly overestimated. The current model assumes that the increase in the U.S. population per year may be overestimated by 1 million people. This could lead to an overestimation of about 50,000 jobs in employment growth in the household survey each month. This article is translated and reprinted from Wall Street, GMTEight. Editor: Li Fo.