US job progress has been revised downward by essentially the most since 2009. Why it's completely different this time

People line up as they wait for the JobNewsUSA.com South Florida Job Fair to open on June 26, 2024 at the Amerant Bank Arena in Sunrise, Florida.

Joe Raedle |

There is a heated debate about the significance of the 818,000 downward revisions to US payrolls – the largest since 2009. Are they a sign of a recession?

Some facts worth considering:

• When the revisions for 2009 were released (the number was overstated by 824,000), the National Bureau of Economic Research had already declared a recession six months earlier.
• Initial jobless claims, a source of data from that period, had risen to over 650,000, and the insured unemployment rate had peaked at 5% that same month.
• GDP had already been negative for four consecutive quarters at that point. (It was later revised upward in two of those quarters, one of them even higher, to indicate growth rather than contraction. However, economic weakness was clearly visible in the GDP numbers, ISMs and many other data.)

The current revisions cover the period from April 2023 to March, so we don't know if the current numbers are higher or lower. It may well be that the models used by the Bureau of Labor Statistics are overstating economic strength at a time of increasing weakness. While there are signs of a weakening labor market and economy, of which this may well be further evidence, the same indicators from 2009 now behave like this:

• No recession was declared.
• The 4-week average of unemployment filings is 235,000, unchanged from last year. The insured unemployment rate is 1.2%, unchanged since March 2023. Both figures are a fraction of what they were during the 2009 recession.
• Reported GDP has been positive for eight consecutive quarters. It would have been positive for even longer if there had not been an anomaly in the data for two quarters in early 2022.

As a sign of deep weakness in the economy, this major revision is, for now, an outlier compared to contemporary data. As a sign that employment growth was overstated by an average of 68,000 jobs per month during the revision period, it is more or less accurate.

However, that only means that average job growth is falling from 242,000 to 174,000. How the BLS breaks down this weakness over the 12-month period will indicate whether the revisions occurred toward the end of the period and are thus more relevant to the current situation.

If that is the case, it is possible that the Fed would not have raised rates quite as much. If weakness continued after the revision period, the Fed could potentially pursue a looser policy now. This is especially true if, as some economists expect, productivity numbers are raised more sharply because the same level of GDP appears to have been achieved with less work.

But inflation numbers are what they are, and the Fed reacted more to those numbers during that period (and today) than to employment data.

So the revisions could slightly increase the likelihood of a 50 basis point rate cut in September for a Fed already leaning toward a September cut. From a risk management perspective, the data could heighten concerns that the labor market is weakening faster than previously thought. During the cutting process, the Fed will watch growth and employment data more closely, just as it watched inflation data more closely during the hiking process. But the Fed will likely give more weight to current unemployment numbers, business surveys and GDP data than to backward-looking revisions. It's worth noting that over the past 21 years, revisions have only been in the same direction 43% of the time. That is, 57% of the time, a negative revision is followed by a positive one the next year, and vice versa.

Data agencies make mistakes, sometimes big ones, and they often correct these errors, even when the election is still three months away.

In fact, economists at Goldman Sachs said later Wednesday that the BLS may have overstated the revisions by as much as half a million. Part of the discrepancy is due to illegal immigrants who are now out of the unemployment system but were originally listed as employed, as well as a general trend that the original revision was overstated, the Wall Street firm said.

Labor market data could be disrupted and fluctuating due to immigrant hiring. However, there is a large body of macroeconomic data that would show signs of this if the economy were to collapse like it did in 2009. But right now, that is not the case.