US nonfarm payrolls preview: healthy labour market despite revisions

Strong labour market: Friday’s nonfarm payroll report will likely show a resilient labour market that does not require further rate cuts. The separate benchmark/annual revisions should not alter the Fed’s or the market’s assessment of the labour market, as the impact on the unemployment rate in January will probably be minimal. In addition, downward revisions to nonfarm payroll data from April 2023 to March 2024 should not surprise anyone. The consensus expects employment to rise by 170k in January, with the unemployment rate remaining steady at 4.1%. Compared to the consensus, we are slightly more optimistic about the US labour market. We forecast 195k job gains and a slight decrease in the unemployment rate to 4.0% in January, down from 4.1% in December. The Fed is currently quite content with labour market conditions. To quote Powell from his January press conference: “The labour market's solid, downside risk to the labour market appears to have abated.” Unless the unemployment rate gradually climbs and approaches 4.5% in the coming months, with employment growing by less than 50k month-over-month consistently, the labour market should not be a reason for the Fed to cut rates further. The Fed aims to maintain the labour market as it is while also seeing continued progress on inflation. However, we believe that will not occur under Trump’s policies. We expect no rate cuts in 2025.

Incoming revisions to payroll survey will not bite: Preliminary estimates show the pre-benchmark payroll figures overstated employment growth from April 2023 to March 2024 by 818k (68k per month) – the largest since 2009 (see chart 1 and 2). While this indicates a less robust labour market, it will not surprise the Fed, who has long acknowledged such overstatements. As Powell said in his September press conference: “We had the QCEW report, which suggests that maybe—that not maybe, but suggests that the payroll report numbers that we’re getting may be artificially high and will be revised down. You know that. […] we will mentally tend to adjust them based on the QCEW adjustment.” For context, Powell was referring to the Quarterly Census of Employment and Wages (QCEW) data -- the benchmark employment estimate in the US. The message here is that the Fed is aware of these revisions and still sees the labour market as healthy (and so do we).

All eyes on the unemployment rate: Unlike the downward revisions to nonfarm payroll employment estimates from April 2023 to March 2024, the historical data on the unemployment rate will remain unchanged. The two estimates come from different surveys: the "establishment survey" for nonfarm payroll employment and the "household survey" for the unemployment rate. The household survey will incorporate new population controls from the Census Bureau. However, only data from January 2025 onwards will undergo such changes. This adjustment will correct the undercounting of net international migration over the past few years, which has contributed to weaker employment growth in the household survey. The process will result in a level shift in household survey data, including labour force, employment, and unemployment figures. As a result, the January household survey data will not be comparable to December 2024 data. We expect the population adjustment to increase the labour force participation rate by 0.1 ppt in January. The unemployment rate and the prime-age employment-population ratio will see minimal impact. Based on our estimate that the population adjustments in the household survey will have a negligible impact on January’s unemployment rate, we believe the low level of initial unemployment claims during the survey week of January’s nonfarm payroll report (despite the California fires), along with recent strong "soft" data, points to a slight decline in the unemployment rate.

Atakan Bakiskan

US Economist

+44 20 3207 7873

atakan.bakiskan@berenberg.com

www.berenberg.com

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