The significant downward revision of non-farm payrolls is indeed "historically rare," but Morgan Stanley does not believe this indicates a recession in the United States
Morgan Stanley pointed out that the significant downward revision of non-farm payroll data in May and June is indeed rare, but the historical data revisions have limited implications for recession risks. The new jobs added in July were 73,000, which is more significant than the downward revision of 258,000 in the previous two months. Although the revision increased the probability of recession by 9 percentage points, the signal value of the employment data for that month is higher, and it is expected that there will be no interest rate cuts in 2025
Morgan Stanley stated that the downward revision of non-farm payrolls in May and June is indeed rare, but the predictive power of historical data revisions for recession risks is limited, and the signal significance of the employment data for the month is more important.
On August 4th, according to news from the Wind Trading Desk, Morgan Stanley's latest research shows that the downward revision of 258,000 jobs in the non-farm employment data for July is the largest historical record since 1979 (excluding the COVID-19 pandemic), approximately 4-5 times the normal revision magnitude.
However, the bank stated that empirical analysis found that historical data revisions have limited predictive power for recession risks.
Morgan Stanley economists believe that although the significant downward revision raises the probability of recession by 9 percentage points, the addition of 73,000 jobs in July is more noteworthy than the historical downward revision, maintaining the expectation of no interest rate cuts in 2025.
Historically Rare Scale of Employment Data Revision
The research report states that the most surprising aspect of the July employment report is the significant downward revision of the previous two months' data. Specifically:
The non-farm employment figure for June was revised down from an initial value of 147,000 to only 14,000, a downward revision of 133,000. The May data was revised down from 144,000 to 19,000, a downward revision of 125,000. Together, these resulted in a net downward revision of 258,000.
Morgan Stanley indicated that from historical data, the average net revision from March 1979 to July 2025 is an upward revision of 12,000. Excluding the impact of the COVID-19 pandemic, this downward revision sets a record for the largest in 46 years.
In absolute terms, the average absolute value of historical revision data is 56,000, with a standard deviation of 61,000, while the downward revision of 258,000 is approximately 4-5 times the normal level, which is statistically considered a significant outlier.
Morgan Stanley Model Shows: Downward Revision Has Limited Impact on Recession Probability
Morgan Stanley's analysis using a Probit regression model found that while significant downward revisions are statistically correlated with an increase in recession probability, the degree of impact is relatively limited; the downward revision of 258,000 only raises the recession probability three months later by 9 percentage points.
However, a more critical finding is that when the employment changes for the month are included as an additional explanatory variable in the model, the statistical significance of the previous two months' revised data completely disappears. This indicates that the signal value of the current month's employment data far exceeds that of historical revision data.
Therefore, Morgan Stanley emphasizes that in assessing the economic direction, the addition of 73,000 jobs in July is more important than the previous downward revision of 258,000. Historical evidence shows that the sharp slowdown in the initial value of non-farm employment is far more correlated with recession risks than the revisions of historical data Based on the various indicators of the July employment report: an employment growth of 73,000 people, moderate wage growth, a slight increase in working hours, and a low unemployment rate, Morgan Stanley believes that these signals for the month are more worthy of attention than the statistically anomalous historical downward revisions.
Although acknowledging that the downward revisions indicate a faster-than-expected and predicted slowdown in labor demand, Morgan Stanley maintains its expectation of no interest rate cuts in 2025.
The firm believes that the risk of recession is indeed still high, but it may not have risen significantly enough to change the overall assessment of the U.S. economy. Morgan Stanley economists remind that there is no need to panic excessively due to a single data revision, and more attention should be paid to the actual employment performance and the comprehensive signals from other economic indicators for the month.
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