Will the September Nonfarm Payrolls See Another "Significant Downward Revision" and Open the Door to a "50 Basis Point Rate Cut"?

U.S. employment data may once again face a “face-slapping” major 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 payroll data. According to projections by Goldman Sachs, Standard Chartered Bank, and others, this could be a significant “employment falsification” of as many as 550,000 to 800,000 jobs. This will directly impact market confidence in the U.S. labor market and may force the Federal Reserve to make a substantial 50 basis point rate cut, just as it did last September.

There are two main reasons for the significant downward revision. First is the distortion of the birth-death model, which overestimates jobs created by new businesses. Second, the sharp decline in illegal immigration has led to a systematic overestimation of the labor force population. It is estimated that these biases may have caused actual employment to be overestimated by 40,000 to 70,000 jobs per month, amounting to an annual inflation of 550,000 to 800,000 jobs.

The implications behind this are very significant. A senior trader at Goldman Sachs stated that the key factor determining Powell’s pace now is not inflation, but employment. If this revision is similar to last September (when BLS also revised down by 800,000 jobs and the Fed immediately cut rates by 50 basis points), Powell may once again face the decision of whether to cut rates by 50 basis points at once, even if only to “prove innocence”—that last year’s rate cut was not a political compromise, but based on a real economic slowdown.

Standard Chartered estimates BLS-reported NFP is overstated by 70,000 jobs per month

Goldman Sachs pointed out that the biggest source of employment data distortion is the BLS’s long-used “birth-death model”. This model is used to estimate the number of jobs created by new businesses, but it is not based on actual business registrations or tax data; instead, it is a model estimate, which tends to systematically overestimate job growth. In contrast, QCEW (Quarterly Census of Employment and Wages) and BDM (Business Employment Dynamics), which are based on records of companies actually paying unemployment insurance, are considered the more reliable “gold standard.”

Using its own model, combined with BED data and higher-frequency business dynamics information, Goldman Sachs found that the BLS model indeed overestimated job growth in the second half of 2024, by an average of 45,000 jobs per month. Although BLS has slightly adjusted the model parameters in recent months and reflected the stabilization in the number of new businesses, the bias remains significant.

Steven Englander from Standard Chartered was even more direct, calling the birth-death model a “fig leaf for the data.” He estimates that the NFP reported by BLS is overstated by 70,000 jobs per month compared to reality.

According to his analysis, since the beginning of 2024, old companies have only added 25,000 jobs per month, while BLS estimates that “new companies” contribute more than 100,000 jobs per month. But BDM data shows that new companies actually account for only 20% of all new jobs, far below the BLS assumption. More seriously, the number of jobs created by new businesses in 2024 is less than 20% of that in 2022. If the model reflected this reality, NFP would be at least 70,000 jobs lower per month.

Englander further pointed out that to maintain basic labor market equilibrium, the “reasonable level” for nonfarm payroll data should be 170,000 jobs per month, with 100,000 from real natural growth and 70,000 from the model’s overestimation.

It is worth noting that although BDM is lagged (latest only up to 2024), like QCEW, it is the data basis used by the U.S. Department of Labor for the mid-year benchmark revision, and its authority far exceeds the sample-based nonfarm payroll data. The employment benchmark revision to be released by BLS on September 9 is based on these data. Once revised according to the real trend reflected by BDM, nonfarm payrolls may be cut by 550,000 to 800,000 at once, which will have a huge impact on market confidence and policy outlook.

Five Major Signals: Signs of Overstated Employment Data Have Long Existed

Goldman Sachs pointed out that in addition to the artificial increase caused by the birth-death model, there are at least five additional reasons further indicating serious problems with the data.

1. Decrease in illegal immigration

Goldman Sachs estimates that the number of illegal immigrants has dropped significantly in recent months. Illegal immigration has a major impact on labor supply. The “immigration wave” from 2022 to 2024 brought a surge in employment demand, but now that immigration has slowed, the actual need for new jobs has also decreased. If BLS continues to estimate employment demand based on old immigration assumptions, it will obviously be too high.

2. Seasonal adjustment models may misjudge trends

Seasonal adjustment models often initially mistake real trend changes for seasonal fluctuations. Only later, when it is confirmed that the trend has indeed worsened, will the model go back and revise the previous data downward.

3. Historically, raw data is always revised downward during economic slowdowns

Historical experience shows that during periods of economic slowdown, the initial raw employment data is almost always revised downward later. This phenomenon has occurred in every recession since 1979 (except once).

4. ADP data questions BLS’s exaggeration of the healthcare industry

As a major U.S. payroll data provider, ADP data shows that job growth in the healthcare industry is far less robust than reported by BLS. In the past three months, new jobs in the healthcare industry have accounted for more than all nonfarm payroll growth. Both ADP and industry analysts believe the situation is not as exaggerated as BLS claims, and the reality may lie somewhere in between.

5. Household survey overestimates immigration and employment

The household survey may currently overestimate U.S. population growth and employment growth. The immigration estimates used at the beginning of the year were reasonable at the time, but are now far too high. The current model assumes that U.S. population growth is overestimated by about 1 million people per year. This may cause the employment growth data in the “household survey” to be overestimated by about 50,000 jobs per month.