After a significant downward revision of 818,000 in non-farm payrolls, Goldman Sachs quickly offered a "reassurance pill": the labor market still shows resilience

According to the financial news app Zhitong Finance, the U.S. Bureau of Labor Statistics preliminarily lowered the benchmark increase in non-farm employment for the year ending in March 2024 by 818,000, marking the largest downward revision in fifteen years. However, the analysis team at Goldman Sachs on Wednesday stated that they believe this revision has been exaggerated, and the resilience of the U.S. labor market may be more optimistic than the numbers suggest.

Prior to the release of the July FOMC meeting minutes by the Federal Reserve, the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announced a downward revision of preliminary non-farm employment data for the past year ending in March. During the period from April 2023 to March 2024, the growth in U.S. non-farm employment was revised downward by approximately 68,000 per month, instead of the previously reported monthly average of about 242,000 new jobs. Goldman Sachs stated that this is largely in line with the market's previous expectations of a decrease in the range of 600,000 to 1 million people.

The downward revision means that the average monthly non-farm employment growth rate for the past year ending in March will decrease to 174,000 people. Despite a slowdown in the labor market recovery after the pandemic, it still reflects a relatively healthy labor market situation. As per government practice, the final adjusted data will be released early next year.

"However, we believe that the government's downward revision of the employment growth rate today has been exaggerated by about 500,000 people, and the labor market still shows strong resilience," stated a research report by the team led by Goldman Sachs Chief Economist Jan Hatzius.

Goldman Sachs provided two core reasons to support its view, stating:

The Quarterly Census of Employment and Wages (QCEW) program may exclude many unauthorized immigrants who are not in the U.S. unemployment insurance system, but were initially correctly included in the wage statistics. In recent years, the QCEW itself has often been revised upwards more frequently. Since the QCEW report is based on unemployment insurance records (unauthorized immigrants cannot apply), the data may exclude thousands of unauthorized workers initially included in the wage estimate.

Therefore, we believe the actual downward adjustment should be around 300,000 or about 25,000 per month, which means that the monthly employment addition during this period is close to 215,000-220,000 people, rather than the 242,000 people shown in the initial report before the revision, but also not as low as the revised figure of only 174,000 new jobs per month.

Goldman Sachs stated that the largest downward revisions were seen in professional services, leisure and hospitality, and manufacturing. The Bureau of Labor Statistics stated that the final annual revised version will be released in February 2025.

It is worth noting that although the overnight non-farm employment figure was significantly revised downward by 818,000, marking the largest downward revision in fifteen years, the financial markets seemed "indifferent" to this revision, with the three major U.S. stock indices still closing higher.

According to Wall Street analysts, the main logic behind this is that the market had already priced in a significant downward revision in non-farm employment, and if the labor market continues to weaken, the possibility of the Federal Reserve becoming more aggressive in cutting interest rates to achieve a "soft landing" for the U.S. economy could see significant growth. Furthermore, shortly after the release of the revised non-farm data, the "July Federal Reserve meeting minutes" showed that Fed policymakers strongly leaned towards initiating rate cuts at the September policy meeting, with several officials even willing to cut rates immediately, igniting market expectations for rate cuts, and a rate cut in September by the Fed may only be a matter of official announcement at the September meeting. During the Wednesday trading session in the US stock market, the minutes of the Federal Reserve's July meeting showed that "several" Fed policymakers have supported the Fed's decision to cut interest rates. As a result, all three major US stock indexes closed higher, with the S&P 500 index just a step away from returning to its historical high set in July.

"My overall feeling is that the Fed may announce a 50 basis point rate cut in September, rather than 25 basis points, as this would be the first rate cut. The Fed may want to boost confidence in a soft landing for the economy, and then cut rates by 25 basis points in November and December," said Tom di Galoma, Managing Director and Head of Fixed Income at Curvature Securities.

Robert Frick, Corporate Economist at Navy Federal Credit Union, stated in a report, "Given that the market had expected a reduction of 1 million jobs, these adjustments are not surprising. This does not challenge our view that we are still in an expansion phase, but it does suggest that we should expect more moderate monthly job growth and additional pressure on the Fed to cut rates."