What does tonight's "historic revision" of the non-farm payroll mean for the market?

The U.S. non-farm payroll report for January will be released tonight, along with annual revision data, which may become a key reference for the Federal Reserve's subsequent actions.

At 21:30 Beijing time on Friday, the U.S. Bureau of Labor Statistics (BLS) will release the January non-farm employment report. The market expects an increase of 170,000 jobs, significantly lower than the previous value of 256,000, marking the lowest level in three months. Considering that the Los Angeles wildfires and cold weather may respectively drag down employment by 40,000 and 30,000, Morgan Stanley predicts a job growth of 140,000.

Meanwhile, the unemployment rate is expected to remain at 4.1%, with hourly wage growth likely maintaining at 0.3% month-on-month and a year-on-year increase of 3.8%. If the annual growth forecast is accurate, it will be the lowest level since July 2024.

It is noteworthy that the biggest highlight of this non-farm report is the annual revision of employment data for the 12 months ending March 2024. Economists expect the actual downward revision to be between 600,000 and 700,000, slightly lower than the preliminary estimate. The preliminary estimate from August last year indicated a downward revision of 818,000, the largest decline since 2009.

Additionally, the annual benchmark revision is expected to show a population increase of 3.5 million and an increase in household employment of 2.3 million, reaching a historical high. Media reports expect the population adjustment to raise the unemployment rate by 5 basis points in January.

Historic Revisions Become the Focus

When the U.S. Bureau of Labor Statistics releases the January non-farm report, it will include an annual benchmark revision of the household survey. This benchmark revision will re-anchor the non-institutional resident population of the survey to the newly released census forecasts, leading to adjustments in labor force, household employment, and other indicator levels.

In the post-pandemic era, the results of the Bureau of Labor Statistics' two surveys have diverged significantly. The establishment survey is used to calculate non-farm employment, while the Bureau calculates the unemployment rate based on the number of households. The latter's view of employment conditions is less optimistic and may be corrected through revisions.

Goldman Sachs stated in a previous report that the January non-farm payrolls in the U.S. will face the largest adjustment in history, with immigration data undergoing significant revisions. The December census last year raised the net immigration estimate for 2021-2024 by 3.5 million. After the annual benchmark revision of the household survey, the total labor force is expected to increase by 2.5 million, household employment by 2.3 million, the labor participation rate to rise by 11 basis points, and the unemployment rate to increase by 4 basis points.

With adjustments to immigration and population, the total number of new jobs is expected to decline significantly. Economists predict that the actual downward revision of January's non-farm employment could reach 600,000 to 700,000.

When the preliminary revision data is released in August 2024, it is expected to show that the number of new jobs from April 2023 to March 2024 was 818,000 less than previously reported, marking the largest downward adjustment since 2009. Subsequently, the Federal Reserve panicked and significantly cut interest rates by 50 basis points a few weeks later based on this.

It is noteworthy that in recent years, immigration has been a major driver of job growth. Goldman Sachs stated that young Hispanic and young Asian populations have higher labor participation rates and higher unemployment rates than the average population Therefore, the disproportionate increase in the population size of these groups will raise the overall labor force participation rate and unemployment rate.

What is the impact on the Federal Reserve?

Analysis suggests that although job growth has slowed, the overall employment situation remains solid and is unlikely to become a concern for the Federal Reserve.

Recent leading indicators show that while hiring has stabilized, layoffs have not increased, and employees are not leaving in large numbers; there has simply been a reduction in job vacancies.

Joseph Brusuelas, Chief Economist at RSM, stated:

Inflation is currently at an acceptable level, and businesses are very willing to continue investing. A job growth of around 150,000 per month is sufficient to keep the labor market stable. In other words, we are in a state of full employment, which is a good problem to have.

Eric Winograd, Head of Developed Market Economic Research at AllianceBernstein, believes:

The labor market is more important to the Federal Reserve than tariff issues. Although monthly data may fluctuate, there has been no significant change in employment data in recent months, which is enough for the Federal Reserve to remain cautious.

Overall, the analysis suggests that if the report is close to expectations, it is unlikely to impact the Federal Reserve even if tariff issues persist. This relative stability is a welcome sign, and the Federal Reserve may remain on hold until summer while officials wait to observe the impact of Trump's fiscal agenda, which includes imposing aggressive tariffs on U.S. trading partners.