This episode demystifies the US jobs report, revealing why persistent data revisions and shifting immigration patterns are forcing investors to rethink how they interpret economic strength.
Understanding the Jobs Report: Household vs. Establishment Surveys
- The Household Survey (Current Population Survey): This survey involves calling households to gather data on the labor force. It is the source for key metrics like the unemployment rate, labor force participation rate, and the employment-to-population ratio.
- The Establishment Survey: This survey collects data directly from business establishments (individual worksites, not just firms) on the number of employees, hours worked, and wages paid. This is the source for the headline non-farm payroll number, average hourly earnings, and the average workweek. Guy notes this survey is the primary source of the data revisions that have recently drawn significant market attention.
The Mechanics of Data Revisions
- Monthly Revisions: These occur in the two months following the initial release. They are primarily caused by the BLS receiving more data, as some businesses respond to the survey more slowly than others. Response rates, particularly early ones, have been falling, making initial estimates less precise.
- Annual Revisions: These larger adjustments happen once a year. They are driven by the birth/death model, a statistical tool the BLS uses to estimate job creation from new businesses (births) and job losses from businesses that shut down (deaths). Guy explains that post-pandemic, business churn has increased, making this modeling more difficult.
- The Downward Trend: Recent annual revisions have been consistently negative. Guy attributes this to the economy being in a very slow, multi-year cooling phase. The BLS models have been slow to catch this gradual deceleration, leading to initial overestimates of job growth.
Guy Berger states, "I don't want to say that like I'm glad to have these revisions. I just recognize this is not an easy problem to solve."
The Immigration X-Factor and Its Impact on Data
- Labor Supply Shock: The immigration surge in 2023 and early 2024 dramatically increased the labor supply. This explains the unusual period where high payroll growth occurred alongside a rising unemployment rate.
- Decoupling Payrolls and Unemployment: Now, with a clampdown on immigration, labor supply growth is slowing sharply. This means a lower break-even payroll number—the number of jobs needed each month to keep the unemployment rate stable—is required. This creates a new dynamic where low payroll growth does not necessarily signal a weak labor market or an impending recession.
A Fragile Equilibrium: Labor Supply vs. Demand
- Opposing Forces: He uses the analogy of a chaotic scene where huge forces are pushing against each other, yet the net result appears calm for now. "There's all these huge things happening and they're pushing against each other."
- Strategic Implication: This stability could be easily disrupted. A sharp drop in demand from factors like tariffs could cause unemployment to rise quickly. Conversely, a more severe immigration squeeze could tighten the labor market further, even with low job growth. Investors should not mistake the current stability for a durable trend.
Reading the Tea Leaves of Weekly Claims Data
- Initial Claims: This is a flow measure representing new filings for unemployment benefits. It serves as a real-time proxy for layoffs. While structural factors may keep the absolute level low, Guy emphasizes its usefulness for tracking short-term changes in layoff trends.
- Continuing Claims: This is a stock measure of the total number of people currently receiving unemployment benefits. It acts as a proxy for the segment of the unemployed who have lost their jobs and are actively seeking new ones, offering a more granular view of labor market distress.
JOLTS Data: Focusing on Hiring and Quits
- Hiring and Quits as Key Indicators: He stresses that hiring and quits are the primary drivers of the labor market cycle. Strong hiring and a high quit rate (people voluntarily leaving jobs, often for better ones) signal a healthy, dynamic market. These indicators have cooled significantly from their 2021-2022 peaks.
- Layoffs as a Lagging Indicator: In contrast, layoffs are a lagging indicator. They tend to remain low and stable until a recession is well underway. Focusing on hiring and quit rates provides a much earlier read on the health of labor demand.
The Beveridge Curve and Market Slack
- A Conceptual Framework: While he is skeptical of putting too much weight on the job openings data itself, he sees the Beveridge Curve as a useful conceptual framework for understanding the trade-off between labor demand and unemployment.
- Recent Stability: He notes that after a period of unusual movement, the relationship has stabilized over the past year, with the market stuck in a "big blob" on the chart. This reinforces the theme of a market that has stopped deteriorating but has not yet re-accelerated.
Final Outlook: Stability with Downside Risk
- Base Case: His base case is for a continued slow cooling, with hiring and quits drifting down further. However, he acknowledges a wide range of possibilities.
- The Fed's Position: He suggests that without a sharp deterioration in the labor market or a significant improvement in inflation, any potential easing from the Federal Reserve will likely be minimal. The data does not currently support aggressive rate cuts.
Conclusion
The conversation reveals a labor market in a fragile balance, not a clear decline. Investors and researchers must look beyond headline NFP numbers, focusing on turnover data from JOLTS and weekly claims to detect shifts in the underlying supply-demand dynamics before they become obvious macro trends.
