While the financial media is going stark raving mad about a company that invests in non-existent profits from a non-physical investment that requires neither actual production, value, or use, the reality of the upcoming non-farm payrolls report is about to hit very unstable bond and equity markets straight in the nose.
These pages have been pretty good at estimating the NFP reports for several months, with some notable exceptions when political influences override economic reality. Thus why the report on Friday might well be one of the most crucial for Federal Reserve and US Treasury policy moving forward. Especially since the statistical benchmark revisions will be issued with the January 2025 report which will absorb the drastic revisions warned about by the Philadelphia Federal Reserve and recalculate the reality now without the overhang of election season.
I’ll out line some of my methodology for my analysis before issuing the prediction.
I. Metropolitan Area Employment and Unemployment Summary
This report was issued by the Bureau of Labor Statistics(BLS) today and had some fascinating underlying data which indicates a slowing in the employment dynamics of the US economy. To highlight the most prevalent, let’s begin with this headline from the BLS:
December jobless rates up over the year in 266 of 389 metro areas; payroll jobs up in 36
This brings into the discussion a theory that yours truly and many others who have discussed the theory that a recession, not “the” recession began in the spring or summer of 2024. This particular report focuses on December and is a lagging indicator but indeed might well point to the outcome for January of 2025:
Unemployment rates were higher in December than a year earlier in 266 of the 389 metropolitan areas, lower in 95 areas, and unchanged in 28 areas, the U.S. Bureau of Labor Statistics reported today. A total of 85 areas had jobless rates of less than 3.0 percent and 8 areas had rates of at least 8.0 percent. Nonfarm payroll employment increased over the year in 36 metropolitan areas and was essentially unchanged in 353 areas. The national unemployment rate in December was 3.8 percent, not seasonally adjusted, up from 3.5 percent a year earlier.
Interestingly enough, if one reviews the same report from December of 2023, it was substantially better:
Unemployment rates were higher in December than a year earlier in 230 of the 389 metropolitan areas, lower in 128 areas, and unchanged in 31 areas, the U.S. Bureau of Labor Statistics reported today. A total of 9 areas had jobless rates of less than 2.0 percent and 10 areas had rates of at least 8.0 percent. Nonfarm payroll employment increased over the year in 61 metropolitan areas and was essentially unchanged in 328 areas. The national unemployment rate in December was 3.5 percent, not seasonally adjusted, up from 3.3 percent a year earlier.
Obviously there has been deterioration which brings into doubt some of the headline numbers the former administration and the financial media touted in early January attempting to paint the tape that President Biden was some sort of miracle worker with the economy when reality viewed with open eyes dictates otherwise.
This increase in unemployment might seem marginal, but keep in mind all of the data is before benchmark revisions which could indicate a might higher rate of unemployment for the second half of 2024 and January 2025 due to statistical revisions.
II. Business Employment Dynamics Summary
This is one of those statistical “blips” that the mainstream and financial media tends to ignore from the BLS. However, when analyzed in depth, gems like this one reporting on the second quarter of 2024 are glaring from this report issued on January 29th:
Gross Job Losses
In the second quarter of 2024, gross job losses represented 5.9 percent of private-sector employment. Gross job losses are the result of contractions in employment at existing establishments and the loss of jobs at closing establishments. Contracting establishments lost 6.2 million jobs in the second quarter of 2024, an increase of 448,000 jobs from the prior quarter. In the second quarter of 2024, closing establishments lost 1.6 million jobs, an increase of 191,000 jobs from the previous quarter.
Gross Job Gains
In the second quarter of 2024, gross job gains represented 5.8 percent of private-sector employment. Gross job gains are the sum of increases in employment due to expansions at existing establishments and the addition of new jobs at opening establishments. Gross job gains at expanding establishments totaled 6.0 million in the second quarter of 2024, a decrease of 91,000 jobs compared to the previous quarter. Opening establishments accounted for 1.6 million of the jobs gained in the second quarter of 2024, an increase of 74,000 jobs from the previous quarter.
The indicators tend to reflect a slow down in the economy and potentially over-estimation of job creation, however the benchmark revisions should hopefully provide more insight as to the level and how much.
If one is wondering how this data is compiled and why it is so important, the first paragraph from the BLS technical notes should answer one’s questions:
The Business Employment Dynamics (BED) data are a product of a federal-state cooperative program known as the Quarterly Census of Employment and Wages (QCEW). The BED data are compiled by the U.S. Bureau of Labor Statistics (BLS) from existing QCEW records. Most employers in the U.S. are required to file quarterly reports on the employment and wages of workers covered by unemployment insurance (UI) laws and to pay quarterly UI taxes. The QCEW is based largely on quarterly UI reports which are sent by businesses to the State Workforce Agencies (SWAs). These UI reports are supplemented by two additional BLS data collections to render administrative data into economic statistics. Together these data comprise the QCEW and form the basis of the Bureau’s establishment universe sampling frame.
Hence with the shocking QCEW data released last August which triggered massive market volatility, this report is crucial to understanding the longer term trends leading into the benchmark revisions and the current non-farm payrolls report.
III. Benchmark Revisions
The preliminary data in August of 2024 reflected a revised job creation figure of -818,000 jobs which caused an earthquake in financial markets. As the political silly season is now in the rear view mirror, odds are this report will reflect a substantially more drastic revision as the survey data begins to smooth out with more tax and private data hitting the report.
The initial report indicated a 0.6% decline on average from the initial data and outright contraction in some portions and regions of the economy. The largest benchmark revision as outlined by this excellent graph in the Conference Board report from August 23, 2024 provides some perspective:
Considering the massive volatility indicated by this initial report, odds are the benchmark revisions could subtract anywhere from another 100,000 to 200,000 jobs from the 2024 data.
Another disturbing trend of note was the decline in establishments data from the QCEW, be it due to bankruptcies, LLCs failing, or just failure to report which is a glaring statistical anomaly that begin in the first quarter of 2023.
From an average of less than 0.2 to 0.4% variance in the post pandemic era to a dramatic decline on average of 1.175% per quarter in 2023 leading into 2024. Is this the exception or the new reality? Future results might well be the tell as there could have been some massive methodology changes that DOGE or some other researchers can hopefully uncover.
IV. U-6 Never Lies
The December 2024 NFP report indicated a U-6 level, not seasonally adjusted of 7.4%, the highest reading post-pandemic since 2021. While this is not a major factor in calculating the upcoming report for January 2025, there are other time periods worthy of analysis.
The post election periods of 2017 after the Presidential election and 2019 post-midterms, are a great time to see what happened to U-6 after the elections:
The normal spikes occurred as the retail and construction industry endured their normal winter layoffs. But after the pandemic, companies were “concerned” about employee retention. If one has been following the MacroEdge Layoff Tracker however, those concerns are obviously out the window in 2024.
V. Friday February 7 NFP Projection
With all of the revised data, unusual economic stagnation, political considerations now an outside factor, and the uncertainty introduced by the current administration, I fear this will be the revenge of the bureaucracy report of all reports.
The underlying data reported above tends to lean towards a monthly over-estimation of the birth-death model and job creation for the entire 2024 period. This distortion of economic projections might well have resulted in greater policy errors by the Fed and politicians which may well demonstrate that the economy has in fact been in a low level stagflationary period.
Logically a negative print could be considered a possibility, however, the final surge of government “hiring” conducted by the departing Biden administration should prevent that. As the private payrolls probably contracted severely in January, odds are the data will reflect a very low print this Friday as this author predicts below.
Predition:
Non-Farm Payrolls +57,000
U-3 (SA) Rate: 4.3%
U-6 (NSA) Rate: 7.9%
Final Benchmark Revision: -959,000
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