On Jobs, It's All About the Revisions

Economists are furiously marking down their estimates of the underlying pace of jobs growth.

Much of today's commentary on the U.S. payrolls report will focus on the headline numbers. And they're not bad: The economy gained 169,000 jobs, just a hair below the 180,000 Bloomberg consensus forecast. The unemployment rate fell a tick to 7.3 percent, but that's not all good news, as the share of the population with a job also fell a tick.

But the real news is in the revisions. Last month, economists had been reassured by the fact that payrolls grew by a healthy 162,000. But now we learn they didn't. Today, we know that July yielded a lackluster 104,000 jobs. And June's jobs growth has been marked down by a further 16,000, to 172,000. All told, 74,000 new jobs were revised away in this report, and if you count the revisions from last month, that number swells to 100,000. As a result, economists are furiously marking down their estimates of the underlying pace of jobs growth.

Actually, the news is slightly worse than this. Typically, revisions are pro-cyclical, meaning that good news tends to be initially understated. (No one is quite sure why this is, but it's been a fairly robust pattern over the past decade.) And as such, it might have been reasonable to have expected recent healthy reports to have become even healthier. Compared to this counterfactual, today's news really is quite dismal.

The end result: Payroll growth through the first two months of the third quarter has averaged 136,000 jobs a month, compared with 182,000 in Q2 and 207,000 in Q1. The early signs of a self-sustaining recovery which fueled taper-talk have disappeared.

There is one further detail worth emphasizing. While there were 74,000 jobs revised away this month, more than half were in the public sector, suggesting that we shouldn't be too hasty in marking down expectations of ongoing private-sector employment growth.

My best guess is that once you strip out the statistical noise, we're currently creating about 150,000 jobs a month, and the private-sector recovery is a bit more robust than aggregate statistics suggest. Equally, at that sort of rate, further declines in the unemployment rate will come only very, very slowly. If that's right, the Fed is going to want to delay tapering quantitative easing.

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