Upcoming nonfarm payroll revisions: as we approach the annual revisions of the nonfarm payroll (NFP) data, market participants are bracing for potential volatility.
The strength of the employment market provides the Federal Reserve with room to maintain interest rates higher than previously anticipated, given persistent inflation and the uncertain economic impacts of the new administration's policies.
According to FactSet’s consensus forecast, economists expect the U.S. economy added 170,000 jobs in January. This figure is lower than the 256,000 jobs added in December, but analysts indicate that it still reflects a robust labor market. The unemployment rate is expected to stabilize at 4.1%.
Stronger Expectations from Analysts
José Torres, a senior economist at Interactive Brokers, anticipates stronger job growth than the consensus prediction, estimating an increase of 190,000 jobs in January. He attributes this optimism to active performance among small and medium-sized enterprises, which are hiring in anticipation of significant economic growth under the new government.
Torres also mentioned expected tax cuts, a more lenient regulatory environment, and increased focus on domestic manufacturing as factors supporting job growth.
Goldman Sachs economists share a similar outlook, forecasting an increase of 190,000 jobs, citing low layoff rates and strong labor market data. However, they expect that wildfires in California and severe weather could reduce the nonfarm payroll by about 40,000 jobs. Economists at Bank of America project an increase of 200,000 jobs, noting that California wildfires may lead to a decrease of 15,000 to 20,000 jobs.
Torres predicts that the education and health services sectors will lead job growth, with increases also expected in leisure, hospitality, retail, and state and local government employment. Despite uncertainties in Washington's policies, he emphasizes the importance of monitoring how changes in immigration policy might affect labor market performance.
Data released earlier this week showed that the number of job openings in December fell to 7.6 million, reaching a three-month low, which exceeded expectations and aligned with a trend of gradual slowdown in the labor market. Additionally, the ADP employment report for January indicated an increase of 183,000 jobs, the highest since October of the previous year, reinforcing the notion of a steady labor market.
The decline in job openings was primarily driven by professional and business services, partially reversing the increases seen in the previous two months. Significant drops were also observed in healthcare and social assistance, as well as finance and insurance. After sharp increases in prior months, job openings have reverted to a downward trend, which could continue to suppress wage growth and support the Fed’s assertion that the labor market is no longer a source of inflationary pressure.
It's important to note that the January nonfarm payroll report will include the Bureau of Labor Statistics' annual revisions to the nonfarm employment survey. Since 2023, there have been numerous significant adjustments to the NFP data, raising questions about the credibility of these figures.
Initial estimates of nonfarm employment data are based on sampling surveys, while annual revisions utilize more comprehensive data sources, such as unemployment insurance tax records. These records cover nearly all businesses and employees, providing more accurate figures. Additionally, the BLS reassesses and adjusts seasonal factors to ensure that seasonal fluctuations are accurately reflected.
Annual revisions generally cover nonfarm employment data over the past five years, focusing primarily on adjustments to the most recent year's data. The extent of these corrections can vary significantly from year to year. In some cases, revisions may involve only minor adjustments, while in others, they could lead to substantial upward or downward revisions of employment data.
March 2024 is the benchmark adjustment month for nonfarm employment data, impacting both past (April 2023 - February 2024) and future (April - October 2024) data. The data from April to October 2024 will be influenced by the new benchmarks and model adjustments, potentially leading to changes.
Analysts are closely monitoring these revisions, as significant adjustments to previous months' data could dramatically alter perceptions of the labor market. However, economists at Bank of America do not expect substantial changes this time. They believe that downward revisions will primarily focus on the second half of 2023, with only minor adjustments expected for employment growth in the first quarter of 2024. In a report to clients, they stated, “In other words, recent job growth should not be significantly impacted.”
Bloomberg’s economic model predicts that by December 2024, the total number of nonfarm jobs will be revised downward by 934,000, an increase from the initial adjustment of 818,000 in March 2024. An increase in immigration may lead to an upward adjustment of the unemployment rate in 2024, with Goldman Sachs estimating a potential rise of four basis points.
The Federal Reserve maintained interest rates during its first meeting of 2025, citing a “solid” labor market and a stable low unemployment rate. The Fed cut rates three times in 2024, bringing the target range for the federal funds rate down from 5.25%-5.50% to the current 4.25%-4.50%.
Most analysts do not expect the Fed to cut rates again until March or June, with future rate cuts dependent on further inflation data and clarity in Washington’s policies. Currently, according to the CME FedWatch Tool, the market assigns an approximately 85% probability that the Fed will remain unchanged at its March meeting.
As the release of the nonfarm payroll data approaches, market participants should prepare for potential fluctuations stemming from both the current report and the anticipated annual revisions. The adjustments will not only reshape historical employment figures but will also influence future monetary policy and market sentiment. Staying informed and agile will be crucial for navigating these developments in the labor market and their implications for the economy.
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