Major Downward Revision in U.S. Payroll Growth: What It Means for the Labor Market
Monthly non-farm payroll reports released in the U.S. are revised annually, as more accurate data can be obtained in the following months. The preliminary reading of this year's revision report was released yesterday.
According to the revision report published by the U.S. Bureau of Labor Statistics, payroll growth in the U.S. was weaker than initially reported for the year up to March.
Before the report, economists predicted a downward revision ranging between 600K and 1M. The data showed that total payroll employment estimates for the period from April 2023 to March 2024 were reduced by 818K (-0.5%), marking the largest downward revision since 2009.
Prior to the revision, non-farm payroll reports indicated that U.S. employers added a total of 2.9 million jobs in the year up to March, with a monthly average of 242K. However, the revisions revealed that monthly employment gains were actually 174K.
Nearly half of the revision, 358K, occurred in the professional and business services sector. Additionally, job growth in sectors like manufacturing (115K), retail trade (129K), and leisure (150K) was also significantly downwardly adjusted. The fact that a large portion of the revision occurred in white-collar sectors helped dispel concerns that undocumented workers were undercounted.
The preliminary payroll growth revision was interpreted as an indication that the U.S. labor market started to moderate much earlier than previously thought. However, according to some economists, this moderation is not in the danger zone, and the labor market remains strong enough.
Indeed, yesterday's release of the weekly Initial Jobless Claims data showed 232K, which is below the four-week average of 236K. This data helped alleviate the pressure on the USD caused by the revision report. Nevertheless, likely, the Federal Reserve's decision to shift its focus from inflation to labor market risks will gain traction.
July Meeting Minutes Show Fed’s Increasing Concern Over Labor Market
Despite the employment data released at the beginning of the month raising concerns about the labor market, some Fed officials had emphasized the ongoing risks of inflation and stated that they would not be ready for rate cuts without further progress towards the inflation target. These cautious remarks created uncertainty about whether the majority of Fed officials would endorse rate cuts.
However, the minutes of the Fed’s July 30-31 meeting, released yesterday, revealed that the majority of the monetary policy committee members acknowledged that risks to the labor market had increased, while risks to the inflation target had diminished.
The minutes indicate that the committee’s focus has started to shift towards labor markets. Recent revisions could cause the pendulum to swing even more sharply towards concerns about the labor market.
Markets Eye Powell’s Remarks After Latest Labor Data
The latest labor market data comes ahead of Fed Chair Jerome Powell’s speech later today at Jackson Hole. It is expected that the data will help shape Powell’s latest assessment of the labor market.
Additionally, markets are anticipating supportive remarks from Powell regarding rate cuts. However, it’s unlikely that Powell will make any clear statements about the pace or scale of the cuts.
After the recent turmoil settled, market participants reduced their September rate cut expectations to 25 basis points. The odds still favor a 25 basis point cut, with a probability of 73.5%.
The likelihood of a 50 basis point cut, which rose to 38% following the revision data, has since dropped to 26.5% after the jobless claims data. The direction Powell’s speech steers expectations could be crucial for global markets.
Eurozone Economic Activity Boosted by Paris Olympics, But Risks Persist
The Eurozone, where economic activity has remained sluggish for a long time, received an unexpectedly strong boost from the Paris Olympics. The HCOB Purchasing Managers' Index (PMI) released yesterday showed that private sector growth reached its fastest pace in three months.
The composite PMI data exceeded even the most optimistic forecast among economists surveyed by Bloomberg, rising from 50.2 in July to 51.2. The services PMI climbed from 51.9 to 53.3, reaching its highest level since April.
In contrast, the region’s manufacturing activity slumped further, dropping from 45.8 in July to a new year-low of 45.6.
Economists attribute this month’s expansion in the region’s economic activity to the Olympics, warning that there are many signs suggesting that the growth momentum will not be sustained.
One such sign is the sharper-than-expected contraction in Germany, the region’s largest economy. Data released yesterday showed that the manufacturing sector in Germany has significantly contracted, while the expansion in the services sector continued to shrink.
After making its first move towards rate cuts in July, the European Central Bank (ECB) emphasized that future decisions would be data-dependent and made it clear that they had not initiated a time-bound series of rate cuts, adopting a cautious stance.
Since then, uncertainties in the economic outlook have clouded the region’s growth prospects. The risks on the manufacturing side, in particular, are reinforcing expectations that the ECB will opt for a rate cut at its September meeting.
Inflation data from the region on Tuesday showed no change in July compared to the previous month. Headline inflation remained at 2.6%, while core inflation came in at 2.9%.
While the data indicates that inflation is still above the ECB’s 2% target, the slowest pace of input cost increases in the last 40 months could lead to a rate cut at the ECB’s September meeting.
BoJ’s Ueda Maintains Hawkish Stance
Bank of Japan (BoJ) Governor Kazuo Ueda addressed lawmakers in a parliamentary session, responding to questions and providing insights into the BoJ’s policy path.
Ueda cited concerns over the U.S. economy as a catalyst for the market turbulence following the July rate hike decision and the bank's hawkish pivot. Besides, Ueda maintained his hawkish stance, stating that if the economy and inflation remain aligned with forecasts, their position to continue rate hikes would remain unchanged.
However, he emphasized that they would not rush into further hikes, noting the impact of financial market instability on inflation. Ueda’s continued hawkish stance, despite recent turbulence, is seen as a positive development for the Japanese yen.
On the other hand, July inflation data released today indicate that price pressures in Japan persist. Annual headline inflation remained unchanged from the previous month, rising by 2.8%. Annual core inflation rose by 2.7%, in line with expectations, following the previous 2.6% increase.
Given Ueda’s stance in conjunction with the inflation data, market participants do not anticipate any adjustments at the September meeting but foresee the possibility of a rate hike in December.
Strong PMI Data Fuels Debate on RBA’s Next Move
The Reserve Bank of Australia (RBA) kept interest rates unchanged at its August meeting. The minutes released this week clearly indicated that no rate cuts are on the horizon, but Governor Michele Bullock is struggling to convince markets with her hawkish messages. Market participants continue to price in a possible rate cut in November or December.
Meanwhile, yesterday's PMI data showed that private sector activity recorded the fastest growth in three months. This raises concerns that monetary policy may not be tight enough to weaken price and demand pressures. Economists point out that the possibility of the RBA having to raise interest rates before considering any cuts is still on the table.