Fudge factor employment report

The fudge factor

For five years, the cleanest tell in the US jobs report has not been the headline payroll number. It has been the quiet little back-room ledger entry that “makes the math work” when the real economy refuses to cooperate. The birth-death adjustment was designed as an honest tool for an honest problem: estimating how many jobs come from new firms opening and old firms closing before hard census data arrive. But after the Covid era policy bazooka, it started behaving less like a statistical bridge and more like a counterfeit printing press.

The post-pandemic small-business boom looked great on paper because paper was exactly where much of it lived. When PPP funds flooded the system, incentives became warped, shells were created, and the spreadsheet economy began masquerading as the street economy. The result was a labour market that kept “creating jobs” while the revisions kept quietly pulling them back like a stagehand yanking props off the set after the audience had already clapped. Markets can tolerate noise. What they hate is a compass that points north only after the ship has already hit the rocks.

Now the Bureau of Labour Statistics is finally taking a wrench to the plumbing. Tomorrow’s delayed January report is not just another monthly print. It is a full reset of the tape measure, with an annual benchmark revision to the establishment survey and, more importantly, a methodological update to the birth-death model. Translation for traders: the market is about to discover how much of the last year’s “strength” was a lighting trick.

Start with the benchmark. The preliminary estimate flagged a huge downward revision to payroll growth for the April 2024 through March 2025 window, roughly in the neighbourhood of 911k lower in the early read, with the expectation that the final number may be somewhat less ugly. Even if you cut it, you are still talking about something like 750k to 900k jobs that the market thought existed but did not. That alone is not a rounding error. That is a narrative rewrite.

But the real gut punch is what comes next. After the benchmark period, the BLS updates its birth-death forecasts for April 2025 through December 2025 using additional information from the QCEW and the monthly payroll survey. This is where the spreadsheet ghosts tend to congregate. If those updates come in as expected, you could see another 500k to 700k come off. Put it together, and you are staring at the possibility that as many as 1 million jobs vanish from the December 2025 level. Poof. Not layoffs. Not a recession wave. Just a statistical exorcism.

This is where the market psychology shifts. Traders do not trade the past, but they absolutely trade the credibility of the past because it determines how much risk you can put on the next print. When you learn the scoreboard operator has been generous all season, you stop cheering every point and start checking the wiring.

The revisions also change the story arc of momentum. The revised seasonally adjusted series is likely to show the labour market slipping below stall speed back in mid 2024. Think about what that means. The three-month moving average around 55k is not a “soft landing.” That is the economy idling at a red light, hoping the engine does not sputter when it turns green. It is well below the pace many analysts say is needed to keep unemployment steady, and it reframes the entire debate about whether policy was restrictive enough or simply restrictive while growth was already fading.

Then layer in the 2025 contour. After the early April tariff shock, the data may show cooling resumed, with payroll growth negative in multiple months once the revisions and seasonal factors are accounted for. In that version of the movie, the labor market did not just wobble. It briefly lost its footing several times, including a weak patch in August and a headline distortion around government payroll dynamics later in the year. Again, markets can live with volatility. What they cannot live with is discovering that the “resilience” narrative was a function of seasonal math plus a generous birth death plug.

On the raw, non seasonally adjusted side, expectations floating around suggest a large January drop, on the order of a few million jobs, with seasonal patterns typically absorbing most of that into the adjusted number. The problem is the seasonal factor itself becomes a moving target when you re estimate it alongside the benchmark revision and the birth death update. That uncertainty alone can swing the final print by tens of thousands. In other words, even if you think you know the destination, the road signs are being replaced while you are driving.

Alternative indicators are not offering comfort either. Real time trackers have pointed to deterioration, including reports of January payroll declines, with weakness concentrated in goods producing categories and a notable drop in government jobs. When the official data starts to wobble, the street goes looking for shadow prices, and those shadow prices are not exactly screaming strength.

And just to keep things spicy, the population control adjustment for the household survey has been kicked down the road to next month because of the shutdown disruptions. That means even more statistical weather coming in February, including potential downward population level revisions and another household survey rework. In market terms, the labor complex is entering a two month period where every release can come with a footnote that moves the goalposts.

So what matters for traders is not whether tomorrow prints 0k, 65k, or some other number that the talking heads will fight about for six hours. What matters is that the BLS is changing the rules of the game in a way that should reduce the magnitude of annual revisions but will likely increase month to month volatility. That is a huge deal. The birth death model will start incorporating current sample information each month, something that should have happened years ago. The good news is the annual rug pulls should get smaller. The bad news is the monthly prints may start behaving like a live wire.

That is where the market risk lives. When payrolls become more jumpy, every jobs Friday becomes more binary, not because the economy suddenly became more unstable, but because the measurement system is finally admitting it does not know the answer with the false precision it used to claim. You will see more multiple sigma surprises. And multiple sigma surprises do not just move rates. They move positioning. They move risk parity. They move vol. They move the whole macro stack.

Zoom out and the likely message from this revision package is simple. The labor market cooled sharply in mid 2024, dipped again in mid 2025, and any recovery that followed has been gradual and fragile. If the revisions make January look dire, that will not necessarily mean the economy is collapsing right now. It will mean the market has been trading a mirage and is about to reprice the real skyline.

That repricing runs straight into the Fed.

A big downward reset to payroll history is not just an economic datapoint. It is a policy argument. It tells the Fed that the labor market was weaker than it looked when it held steady. It increases the risk that policy was tighter than intended. And it invites the market to pull forward easing expectations, especially if CPI two days later comes in softer than consensus.

This is how the chain reaction works. First, the jobs report stops being a sturdy bridge and starts being a swing rope. Then, rates markets stop debating the terminal rate and start debating the speed of cuts. Then, risk assets sniff a policy backstop, but they also price higher macro volatility because the data itself is now more explosive. The Fed may want calm. The calendar may not cooperate.

My base case is that the Fed cuts materially this year (100 bps+), with the balance of risk skewed toward more rather than less if the labour narrative cracks. Not because the economy is falling off a cliff tomorrow morning, but because the official story is being rewritten in real time, and the Fed cannot run a steady hand regime when the dashboard has been miscalibrated.

The cleanest way to frame tomorrow's NFP is this: we are not getting a jobs report. We are getting a credibility report.

If the benchmark takes a million phantom jobs off the board, the market will stop treating payrolls as gospel and start treating it as a probabilistic weather forecast. And when the weather forecast becomes unreliable, traders do what they always do. They demand a wider risk premium, they lean harder on price action, and they force policymakers to prove the soft landing is more than a slogan.

The birth-death plug is finally being tightened. The question is how many ghosts come rushing out before the seal holds.