The Labor Department announced on Wednesday that the U.S. economy created 818,000 fewer jobs than originally reported over the 12-month period ending in March 2024. The Bureau of Labor Statistics (BLS), as part of its annual benchmark revisions, indicated that actual job growth during this period was nearly 30% lower than the initially reported 2.9 million jobs.
This significant downward adjustment marks the largest revision since 2009 and raises questions about the strength of the labor market at a critical time when the Federal Reserve is considering its next steps on monetary policy. The revised data, which suggests that the labor market may have been cooling more than previously believed, could provide additional impetus for the Fed to consider lowering interest rates in the near future.
"The labor market appears weaker than originally reported," said Jeffrey Roach, chief economist at LPL Financial. "A deteriorating labor market will allow the Fed to highlight both sides of the dual mandate and investors should expect the Fed to prepare markets for a cut at the September meeting."
The most significant revisions occurred in key sectors such as professional and business services, which saw a reduction of 358,000 jobs. Other sectors hit hard by the revisions include leisure and hospitality, with a downward adjustment of 150,000 jobs, manufacturing (115,000 jobs), and trade, transportation, and utilities (104,000 jobs). Retail trade, in particular, experienced a sharp revision with a reduction of 129,000 jobs.
Despite these downward revisions, some sectors saw upward adjustments. Private education and health services gained 87,000 jobs, transportation and warehousing saw an increase of 56,400 jobs, and other services added 21,000 jobs. Government employment remained largely unchanged, with a modest increase of 1,000 jobs.
As of July, nonfarm payrolls totaled 158.7 million, reflecting a 1.6% increase from the same month in 2023. However, the rising unemployment rate, which reached 4.3%, a 0.8 percentage point gain from its 12-month low, has triggered the Sahm Rule-a historically accurate indicator of an impending recession.
While the unemployment rate's increase is partly attributed to more people re-entering the workforce, rather than a surge in layoffs, the labor market's weakening has caught the attention of Federal Reserve officials. With the Fed's next meeting in September, there is growing anticipation that the central bank may approve its first interest rate cut in four years.
Federal Reserve Chair Jerome Powell is expected to provide further insights during his much-anticipated policy speech at the Fed's annual retreat in Jackson Hole, Wyoming, this Friday. Economists and investors alike will be listening closely for any hints of a shift in monetary policy, especially in light of the recent labor market data.
The timing of the BLS revision comes amid a broader debate about the health of the U.S. economy. Some economists argue that while the revisions show weaker job growth, the overall trends in GDP growth, stock market performance, and consumer spending remain positive. "Despite this big downward revision, that's still a very healthy growth rate in terms of the monthly jobs added to the economy," said Omair Sharif, president of Inflation Insights.
However, others caution that the revision underscores the challenges facing the U.S. economy, particularly as the Federal Reserve's current monetary policy stance may be too restrictive. The weak July jobs report, which showed the second-weakest monthly job additions since 2020, further tilted the focus toward a slowing labor market.
Marco Casiraghi, senior economist at Evercore ISI, emphasized the importance of taking a broader view of the situation. "It's important to zoom out a little bit in this kind of situation," Casiraghi told Yahoo Finance. "And I think this is also what the Fed will do. And if you zoom out, you see that the economy is slowing down, but still growing. The labor market is softening, but it's not rapidly deteriorating."
As the market digests the revised job data and prepares for Powell's upcoming speech, the possibility of interest rate cuts looms larger. According to Goldman Sachs chief U.S. economist David Mericle, Powell is likely to express more confidence in the inflation outlook while acknowledging downside risks in the labor market, a stance that could align with expectations of multiple rate cuts before the end of the year.
CNBC and Yahoo Finance contributed to this report.
