What Does The Jobs Market Tell Us About the Economy?

Ah yes, jobs data. One of the most important pieces of information an economist can have when gauging the health of the economy. Job creation or destruction is a core source of information to determine if our economy is growing or shrinking. In fact, anyone with a job feels the impact of changes to the jobs market in a very real way as the businesses they work for strive to continue to grow or play defense as the economy changes.

The Role of the Bureau of Labor Statistics

So why is it that when the Bureau of Labor Statistics releases the jobs number on a monthly basis, there are always revisions to the prior two months releases? And what do those revisions mean when interpreting them in the context of our economy? Let’s take a look at recent jobs data and discuss how these adjustments are actually made.

First, let’s set the stage for what we’ll be focusing on: Monthly nonfarm payroll employment data released by the Bureau of Labor Statistics (BLS). This key piece of data is the most widely followed by analysts as it provides one of the broadest representations of employment within our country. The BLS surveys over 119,000 businesses each month to determine if the companies operating within the United States are adding or terminating employees. This represents approximately 30% of all nonfarm payroll employees across the country.

Factors Influencing Monthly Nonfarm Payroll

There are a few factors to keep in mind when looking at a monthly nonfarm payroll number. First, even though this is an incredibly broad survey, it’s still a survey. The BLS is extrapolating the data they get from this survey to determine a rough number for jobs activity in the country. Second, because it’s a survey, not every business responds in a timely manner! Businesses have different payroll cycles meaning the jobs added or removed from one business might not be captured in the survey the same way another business’s payrolls may be calculated. This is why the numbers are revised over the course of the following two months to allow for the remaining business surveys to be collected.

Over the course of each month, the BLS continues to collect survey data to issue the new month’s release but also revise the prior two month’s releases. Each year, the BLS then goes back and reviews the entirety of the data and reconciles it with state unemployment data. The unemployment data is important because it’s a definitive count of individuals who are receiving unemployment benefits and not a survey. After all revisions have been completed, the revisions often represent less than 0.1% of the total nonfarm payrolls. Currently, total nonfarm payrolls are 158.78 million, which means expected annual revisions based on unemployment insurance should be approximately 158,780.

Long-Term Job Market Trends

The reason we want to understand all of this is because we too often find ourselves in a news cycle focusing only on the most recent nonfarm payroll figures. What we should be focusing on instead is how the prior month’s figures are being revised, but more importantly the directionality of the month-over-month trend. It’s clear these survey data figures can be volatile and misleading. However, when looked at over the course of a few years it’s very easy to see the trend in the data.

In the images above, there are three separate pieces of employment data. The top chart shows total nonfarm payrolls steadily growing over the last three years. As new jobs have been added to the economy, this number will continue to rise (or fall if job losses exceed job gains).

The second chart is the month-over-month nonfarm payrolls. As we can see, the data from month to month can be very volatile. However, it shows us a trend that hiring has slowed over the last three years. We’ve gone from an economy adding around 500,000 jobs a month to one averaging under 200,000 each month.

Finally, the third chart is the U.S. unemployment rate. At 4.2%, it’s higher than it was a year ago, though still lower than three years ago as it was coming off its pandemic highs. Part of the reason we’re seeing unemployment tick higher is because more people are seeking to reenter the workforce. The issue is now that hiring has slowed, these individuals are not findings jobs fast enough and are taking unemployment benefits until a job is found.

What Does All This Jobs Data Mean For The Economy?

In our opinion, it shows an economy that is slowing after a massive wave of COVID-induced stimulus turbocharged employment and inflation. Things are beginning to return to normal, economically speaking. The Federal Reserve has begun its rate cut campaign after years of keeping interest rates high in an effort to fight off inflation. Now that inflation has been tamed, the Fed is focusing on ensuring employment remains stable. One of the tools in their toolkit to fight high unemployment is to lower interest rates to make borrowing more affordable for businesses