January jobs report expected to support disinflation outlook

The upcoming U.S. jobs report for January is expected to reflect solid hiring activity. However, the key takeaway from the report will likely be the significant revisions to both the establishment and household surveys, which could reshape the overall employment narrative.

Employment revisions and adjustments

As part of its annual benchmarking process, the Bureau of Labor Statistics (BLS) is anticipated to significantly lower its employment estimates in the establishment survey. Factoring in updates to the BLS’s “birth-death” model, which estimates net business formation, employment figures for the end of 2024 may be revised down by over 900,000 jobs compared to earlier real-time data.

Meanwhile, the household survey will undergo a major population adjustment, boosting the labor force by nearly 2 million individuals. As a result, post-revision trends in household survey job growth are expected to surpass those in the establishment survey, likely pushing up the unemployment rate.

Overall, the January jobs report may reinforce a disinflationary outlook by suggesting that labor demand has been weaker than previously thought while labor supply has been higher. Given these factors, expectations remain that the Federal Reserve will cut interest rates by 75 basis points over the course of the year.

Key expectations for the February 7 release:

• Non-farm payrolls: Forecasted to show a net gain of 215,000 jobs (down from 256,000 in December), exceeding the 173,000 consensus estimate at the time of writing.
• Non-seasonally adjusted data: Projected to reflect a decline of 2.718 million jobs, compared to the typical seasonal drop of 2.933 million.
• Uncertainty in adjustments: The BLS will update its seasonal adjustment factors, which could shift the payroll estimate by approximately 50,000 jobs in either direction.

Major revisions in the establishment survey

Three primary adjustments will be made to the establishment survey:

1. Benchmarking employment levels:

• The non-seasonally adjusted employment figure for March 2024 is expected to be revised down by approximately 700,000 jobs. This revision will be distributed evenly across the previous 12 months, reducing monthly job growth estimates by 58,000 from April 2023 to March 2024.

2. Updates to the birth-death model:

• Employment estimates for April to December 2024 will be revised downward by 234,000 jobs based on new calculations of net business formation.

3. Seasonal factor re-estimations:

• Seasonal adjustments will be updated to reflect the revised employment data.

Population adjustments and their impact on unemployment

The BLS will also incorporate the latest U.S. census population estimates into the household survey. This adjustment is expected to increase the estimated working-age population by about 2.9 million, with 84% of this growth attributed to international migration. The labor force is projected to rise by 1.8 million, while employment levels could increase by 1.6 million.

Despite these changes, core employment ratios, such as the unemployment rate, labor force participation rate, and employment-to-population ratio, are expected to see only minor shifts due to the methodology used by the BLS:

• The unemployment rate could rise by 5 basis points, reaching 4.16% in January (up from 4.09% previously).
• Labor force participation may increase from 62.5% to 62.6%.

Implications for the economy and monetary policy

While the headline payroll number is expected to be solid, the revisions in the employment data will likely have a greater impact on forward-looking economic assessments. The anticipated downward revisions in job growth figures suggest that the labor market may not have been as strong as previously believed, reinforcing the notion that disinflationary forces remain in play.

Given this outlook, expectations persist that the Federal Reserve will proceed with a series of rate cuts, totaling 75 basis points throughout the year. These adjustments will be crucial for shaping monetary policy and broader economic forecasts moving forward.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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