Lots More on the Big Problem With the Monthly Jobs Report

Episode Summary

Executive Summary: The episode centers on U.S. labor market data quality and interpretation ahead of Jobs Day, arguing that nonfarm payrolls increasingly overstate job growth because of a stale birth-death adjustment, while higher-quality QCEW/BED data point to far weaker underlying creation. The discussion also covers how the Fed may respond, why bond yields are rising despite slower growth, and broader fiscal and political fragility in Europe and the U.S.

Main Topics: Labor market data quality and the birth-death adjustment (Priority: 5/5): The hosts explain that the payrolls report is increasingly hard to read because immigration shifts, post-COVID normalization, and the BLS birth-death model may be biasing monthly job estimates upward, especially the presumed job creation from new firms. QCEW and business employment dynamics as benchmark data (Priority: 5/5): They contrast the monthly NFP sample with the quarterly universe-based QCEW and business employment dynamics data, arguing these more authoritative sources show little job creation from newly opened firms and likely imply large downward revisions. How to interpret weak labor data for the Fed (Priority: 4/5): The conversation weighs whether policymakers should focus less on headline job counts and more on rates such as unemployment, participation, employment-to-population, hiring, firing, and wage growth when assessing slack and policy. Market expectations for the September jobs report and Fed cuts (Priority: 4/5): They discuss consensus for a soft payroll print, the possibility that an extremely weak number could pull forward a larger Fed cut, and how a payroll reading near 100,000 may still imply much softer true job creation after bias adjustment. Bonds, rates, and short-term market positioning (Priority: 4/5): The guests explain why long-end bond yields have risen even as growth softens: markets are reacting to fiscal deterioration and positioning, while near-term moves remain driven by incoming U.S. data and Fed expectations. U.S. versus Europe fiscal and political weakness (Priority: 3/5): The discussion broadens to France and Europe, where high deficits, fragile governments, and weak growth prospects limit policy options. The U.S. is seen as having a better long-run innovation story, despite fiscal concerns. Productivity, AI, and longer-term economic resilience (Priority: 3/5): The speakers note that the U.S. can still tell a constructive story because AI and productivity may boost growth, whereas Europe faces energy, capital-market, and technology disadvantages that make private-sector-led growth harder.

Key Arguments: The headline payroll number is less informative than it used to be because labor supply has shifted and the BLS birth-death adjustment may be overstating job gains from new businesses. QCEW/BED data are more reliable than NFP because they are based on administrative universe data, not a sample, and therefore better capture openings and closures. The employment situation may be materially weaker than monthly NFP suggests; the speakers estimate the cumulative overstatement could be 750,000 to 1.1 million jobs from Q1 2024 to Q1 2025. Policy should rely more on labor-market rates than levels, but the employment-to-population ratio may be more revealing than the unemployment rate during cyclical slowdowns. A payroll print around 75,000 is near consensus, but a number near 30,000 would be a major negative surprise and could shift Fed expectations toward a 50 bp cut. Bond yields are rising not because growth is strong, but because markets are balancing near-term recession/cut risks against medium-term fiscal and inflation risks. Europe, especially France, appears structurally weaker than the U.S. because of fragile politics, fiscal consolidation constraints, higher energy costs, and weaker innovation ecosystems. The U.S. still has a plausible optimism case thanks to AI and productivity gains, even if the current data suggest a slowdown.

Data Points: Consensus nonfarm payrolls estimate: 75,000 - Referenced as the market expectation for the upcoming Jobs Day report. Expected unemployment rate: 4.3% - Economists expected a small increase from the current level. Current unemployment rate: 4.2% - Used as a key labor-market rate the Fed is watching. JOLTS hiring rate: 3.3% - Mentioned as one of the “rates” preferred over raw job levels. Initial jobless claims: 237,000 - Soft data released during the week, above the 230,000 estimate. ADP employment: 54,000 - Private payroll gauge, below the 68,000 estimate and down from a revised 106,000 prior reading. ISM services employment index: 46.5 - Below expectations, signaling softer hiring in services. Employment-to-population ratio: 59.6 - Cited as having declined from above 60 a year earlier. BLS sample size: ~160,000 businesses / 600,000+ establishments - The monthly NFP survey is large but still only a sample. Birth-death adjustment contribution: ~100,000 jobs per month - Described as staying stubbornly stable even as other data weaken. Potential job overstatement: 750,000 to 1.1 million jobs - Estimated cumulative overstatement between Q1 2024 and Q1 2025. QCEW lag: About 8 months - Explains why the more accurate administrative data arrive with delay. Sample range of job forecasts: 40,000 to 100,000 - Most market participants were said to be clustered in this narrow range.

Pivotal Quotes: "It is about business formation." — Joe: Clarifying what the birth-death adjustment actually measures in the payroll report. "If you think that there is still some legal immigration coming in, maybe you're at 100." — Speaker describing labor supply assumptions: Explaining why estimates of monthly job growth now depend heavily on labor-supply assumptions. "Because Trump has his own BLS person now, I don't necessarily see a bad number on Friday." — Unnamed analyst note quoted by the host: A revealing comment about market skepticism regarding the independence of the incoming jobs print.

Implications: Listeners should treat monthly payrolls with caution and watch benchmark data, labor-market rates, and revisions. For markets, a weak print could accelerate Fed cuts, while persistent fiscal and inflation risks may keep long-term bond and FX volatility elevated.