Re-point of origin: The 2025 preliminary benchmark to Payrolls

Summary

Concerns about the labor market have been fanned by July's eye-catching downward revisions to payrolls. Those concerns are unlikely to be eased by the first look at the 2025 benchmark revision to employment, which we expect will show job growth was already flying at a lower altitude.

On September 9, the BLS will release its preliminary benchmark revision of the non-seasonally adjusted level of payrolls for March 2025. Based on the Quarterly Census of Employment and Wage (QCEW) data available through the end of 2024, a preliminary revision of -475K to -790K jobs strikes us as reasonable, which would rival last year's downward adjustment (-598K). This range equates to payroll growth in the 12-months through March 2025 averaging 83K to 110K versus 149K as currently published.

The likely overestimation stems from a variety of sampling and nonresponse errors inherent in surveys. While difficult to isolate, a few potential sources stand out:

• Although the "birth-death" factor has been less generous this past year, we still see scope for overestimation given that data on business openings show the rate of net new firm creation has fallen below its pre-pandemic pace.
• The establishment survey's overall response rate averaged 43% in the 12-months through March 2025, down from 59% in 2019. The falling response rate leaves greater room for firms who are responding to be systematically different from the non-respondents.
• The primary source for the benchmark revision, the QCEW data, is based on tax filings for unemployment insurance. Its employment count is more prone to exclude undocumented workers since they are not legally eligible for these benefits versus the more informal payroll survey which simply asks for the total count of employees.

This year's benchmark revision appears somewhat less fraught than last year's due to the unemployment rate moving sideways since last July. Slower growth in the labor supply means that the economy does not need to be adding as many jobs to keep slack from building, as the "breakeven" rate of employment growth has fallen. Yet, with the benchmark revision likely to show a weaker pace of job growth through March, a loss of momentum at the beginning of the year would cast a shadow on the true strength of payroll growth since then. In short, even as the labor market is still standing, its footing is becoming more tenuous.

Tuning up the Payroll altimeter

Nonfarm payroll growth has decelerated since the start of the year but, until the past few months, showed employment continuing to expand at a respectable clip. The endurance of job growth has allowed the FOMC to return its focus to its unfinished fight against inflation. After cutting the fed funds rate by 100 bps in the final months of 2024, the FOMC has held its policy rate at 4.25%-4.50% for the past eight months. Yet, the first look at the 2025 benchmark revision to nonfarm payrolls is likely to show that job growth was flying at a lower altitude even before the July employment report's eye-catching monthly revisions. How much closer to the ground have payrolls been flying, and what could that mean for the FOMC's interpretation of the jobs market?

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