Big Error on Jobs Forecast Could Have Policy Ramifications

Faced with what I suspect is the biggest-ever forecasting error for a single data release — the U.S. employment report for May on Friday — the community of applied economists and Wall Street analysts is trying to determine what went wrong in their approach and how this applies to other key projections and policy recommendations. Their work is being complicated by questions about the robustness of some of the data compilation and classification practices used by the Bureau of Labor Statistics and Census Bureau, especially during a pandemic, as well as the high degree of political polarization of numbers. While the work is continuing, some elements are already clear, at least to me.

What makes this forecasting error so historic is more than the magnitude of the miss on the two widely reported and followed headline numbers: net jobs created, where the consensus expectation was off by an astounding 10 million, and the unemployment rate, off by some 6 percentage points, or what Wall Streeters like to call “six big figures.” In addition, economists and Wall Street analysts were uniformly wrong on the direction of the move, forecasting deterioration when the vast majority of the reported numbers pointed to a uniform improvement. The homogeneity of the miss was also notable as not one of the 78 economists surveyed by Bloomberg came close to the actual number. For example, the most optimistic projection for payrolls was a decline of 800,000; the actual number was an increase of 2.5 million.