Data from the BLS, chart by MishThis is a complicated post that goes into some of the more arcane procedures the BLS uses to produce the monthly jobs report.But please read on. I will tie everything together after a discussion of the data used in this post.As a bonus, I have confirmation from Bloomberg’s chief economist who arrives at similar numbers.BED Notes

Birth-Death Notes

CES Notes

Synopsis!In normal times, not entering into recession or out of recession, the birth-death model is subject to mostly random fluctuations.The monthly jobs reports are not very accurate, but errors generally balance out over time.It’s another matter near recessions and the last one was one for the record books.It’s important to note that BED and the Birth-Death model numbers are both by the BLS and are supposed to measure the same thing (net new job creation or losses by businesses).BED Net Jobs vs Birth-Death Model In the Covid-Recession, massive numbers of businesses closed then six months later massive numbers of businesses opened.Let’s throw away all that and just look at what’s happened between 2022 and now.I repeat the lead chart for convenience.BED Net Jobs vs Birth-Death Model Net Jobs
Chart Details (Both Sets of Numbers from the BLS)

Here’s a second opinion.Statements from Anna Wong, Bloomberg Chief Economist (via email)

Labor-market watchers broadly have been split into two camps over the past year: those who saw resilience — justifying the Federal Reserve’s higher-for-longer rate stance — and those who saw momentum fading — which could warrant bringing rate cuts forward.

Bloomberg Economics has been in the latter camp, which is gaining traction of late. Cooling in the labor market has long been evident, in our view, particularly in real-time firm birth-and-death data.

The Bureau of Labor Statistics’ fourth-quarter Business Employment Dynamics report confirmed nonfarm payrolls data have overstated labor-market strength for almost a year.

As such, we think the labor market hasn’t just approached an inflection point — rather, it’s likely passed it. If the Fed waits until September to cut — still our baseline — it’s probably too late.

The nonfarm payrolls report, one of the timeliest labor-market indicators, is among the most-followed economics releases. Data are collected through the BLS’s Current Employment Statistics (CES) program. However, the trade-off for timeliness is reliance on forecasts for the net employment change from firm births and deaths — the true value of which is only known with a very long lag.

That creates a potential for CES revisions at key points of an economic cycle. For example, CES-based payrolls data for 2023 won’t fully reflect underlying firm net closures until early 2025.

For a more timely read on firm births and deaths, we rely on two other BLS reports: the Quarterly Census of Employment and Wages (QCEW) — which provides the most comprehensive employment data among official statistics — and the Business Employment Dynamics series (BED) — a longitudinal sub-sample of the QCEW. Both cover a substantially broader set of firms than the CES survey, which only covers 670k establishments.

Based on that data, we estimate that nonfarm payrolls as reported by the establishment survey will likely be revised down by 730k for the last three quarters of 2023.

QWEC Establishment Counts Have Plunged Since Mid-2023. The 4Q23 BED data confirm that assessment.

The reason CES birth-death factors are exaggerated is the lagged availability of firm deaths data, and the forecasting equation of those factors is backward-looking, and heavily influenced by the elevated rate of business formation during the pandemic.

Looking beyond 2023, we use Chapter 11 bankruptcy and business formation filings to estimate what net employment from firm opening and closures looked like in 1Q24. The results suggest the downtrend continued. Bankruptcy data for 2Q24 isn’t available, but business formation data for 2Q24 has cooled further, and is down 5.3% since 4Q23.

Bottom line: The labor market has been cooling for awhile — the deterioration isn’t sudden. Given its dual mandate, the Fed is likely behind the curve on cutting rates. As such, we expect the unemployment rate to reach 4.5% by the end of 2024.

Pending Negative RevisionsLet’s use Anna Wong’s estimate of 730,000 overstatement vs my calculation of 779,000.730,000 represents a BLS jobs overstatement of 81,111 jobs every month for 9 months.On top of that, does anyone believe the birth/death total for 2024 Q4 of 653,000?That’s the highest quarterly total dating to at least 2017 Q1. And we will not know how flawed that number is until the end of 2025.Jobs Much Weaker than Expected, the Unemployment Rate Ticks UpCounting negative revisions, there was unexpected weakness across the board in June, especially private and manufacturing payrolls. Data from the BLS, chart by MishJobs are from the CES monthly survey, discussed above. Employment and unemployment are from a separate BLS Household Survey.The discrepancy is massive. But BED and QCEW confirm which one is accurate.Yet, every month, economists go gaga over garbage headline jobs numbers.On July 5, I noted Jobs Much Weaker than Expected, the Unemployment Rate Ticks UpJob Stats vs One Year Ago

BLS Nonfarm Payroll Prior Revision Magnitude
On July 7, I asked How Much Faith Do You Have in BLS Job Reports?

Let’s check out BLS job report revisions from January 2023 through June of 2024 in a series of four charts.

There were only three upward second revisions in 18 months.

In the above post I go over QCEW data, a bit more detailed than the BED subset and estimate a pending revision of ~900,000.These drop-by-drop revisions may eat into that, or not. But the birth-death second quarter whopper of 653,000 is not in QCEW data and we need to wait until late 2025 to know what it really happened.Recession Has Already StartedI repeat my July 8, 2024 recession call: Weak Data Says a Recession Has Already Started, Let’s Now Discuss When

I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.

“All Hell Breaks Loose” In the Next Few Months as Recession BitesFor more details a second opinion on recession, and more charts, please see “All Hell Breaks Loose” In the Next Few Months as Recession BitesMore By This Author:Personal Income Revised Lower For April And May, Spending Higher In May Homebuilder Inventory Of Started But Unsold Homes Is The Highest Since 2008 The Yield Curve Is About To Uninvert, Is That A Recession Indicator?