Is the US Federal Reserve cooking the numbers?

In this article, we will cover Exness opinions alongside reporting from The Wall Street Journal, a commercial partner of Exness. The S&P 500 is at a 1-year high of $4459 (USD). The greenback continues to dominate JPY and hold ground against the Euro. On the surface, everything looks good in the USA. But, the U.S. debt ceiling is on the rise. More countries in Africa, South America, and Asia are joining the BRICS and ditching the dollar for non-U.S. trade matters. 

Meanwhile, billionaire investors are shouting that the U.S. economy is on the brink of collapse, and yet the Fed remains optimistic, repeating that “the U.S. economy is strong.”

Mainstream U.S. media continues to paint a rosy picture, but some are now waking up to the inconsistencies the Fed is feeding to the world. Here’s what the Wall Street Journal had to say about the latest employment figures showing positive growth.

Some data signal more weakness than high-profile payroll survey implies

On its face, the economy looks strong. Output grew 2% annualized in the first quarter, and employers have boosted payrolls by 1.6 million so far this year, about 2.5% annualized—nearly twice the average increase in 2019. But some economists say the job market might actually be weaker, and the economy closer to recession, than those figures imply. The reason: quirks in how the payroll data are calculated. They note that the payroll data are out of step with other data showing a much weaker economy.

The unemployment rate leapt 0.3 percentage point to 3.7% in May, the sharpest one-month increase since 2010, outside of the pandemic recession in 2020. The weakening of employment measures in business surveys and a decline in hours worked could also be signs that the payroll report is behind the curve. Economists usually look to the payroll survey as the most accurate, complete picture of the job market. But a handful of economists point to blind spots that mean it could be counting more jobs than are actually being created.

“It’s more than 50% likely that it’s an overestimate, but it’s far from certain,” said Steve Englander, head of North America macro strategy at Standard Chartered. The overstatement could be as much as a couple of hundred thousand jobs a month, he said.

Such a distortion could be masking the impact of the Federal Reserve’s tightening on employment, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko.

“It’s possible that the Fed is dealing with an economy that’s not as robust as it thinks with a labor market that’s not as healthy as it thinks it is,” he said, adding that the overstatement of payrolls could be running at around 77,000 a month.

Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez, said the payroll survey is more likely to overstate jobs when labor market conditions are changing quickly, which isn’t the case right now. “It’ll be a slower process this time because companies are behaving differently due to the limited supply of labor,” he said.

Divergent jobs reports

The monthly jobs report, usually published the first Friday of each month and watched closely by investors, policy makers and businesses, consists of two surveys. The payroll survey is based on a sample of more than 122,000 businesses and government agencies covering around 42 million workers—about 28% of formal employment. The household survey is based on a sample of 60,000 households. The payroll survey showed a gain of 339,000 jobs, while the household survey showed employment falling 310,000 and the number of unemployed leaping 440,000 to its highest level since February 2022.

The two surveys often diverge because of statistical noise or because they define employment differently. For example, the self-employed are counted by the household survey but not the payroll survey, and their numbers fell sharply in May. 

Historically, economists consider the payroll survey a more reliable indicator of labor market health, except at turning points in the economy. For example, from 2007 to 2010, a period dominated by recession and a weak recovery, the payroll survey overstated jobs by a cumulative 1.7 million, as shown by subsequent, more comprehensive tax data.

A blind spot on new and failed companies

A major cause of such overestimates is related to jobs created by startups and lost by business closures. The survey has no way of capturing businesses it doesn’t yet know exist, or whether a company that doesn’t respond to the survey is ghosting it, or has closed, until many quarters later, when tax data become available.

Until then, the Bureau of Labor Statistics uses a “birth-death model” to extrapolate from recent trends how many jobs are created by new companies and lost to business closures. Its contributions are significant, said Omair Sharif, founder of Inflation Insights. “In some years, business net births make up around 40% of the payroll increase.”

But when a weakening economy is closing companies and snuffing out new business, the model might erroneously count jobs that haven’t actually been added. In the 12 months through May, net births contributed 43% of the net increase in private-sector payrolls—on the high side of the historical range, though in May the contribution was just 26%. That might simply be a sign of the jobs created by a startup boom that took hold since the pandemic’s onset. It is also possible that the birth-death model is overestimating net new business creations, as it has at previous economic turning points.

Given the Fed’s series of interest-rate increases, now totaling 5 percentage points, “and tightening credit conditions—which have already pushed small-business confidence to recession levels—the strength of the birth-death model looks implausible,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “If the true rate of formation has returned to the 2019 level, then the birth-death model is adding about 30,000 too much to payrolls each month,” he said.

If so, the current robust rate of job gains might be revised lower. In August, the Labor Department will publish a preliminary, estimated revision to payroll data for March 2023 that will ultimately be incorporated in February 2024, based on the final tax data. Jonathan Pingle, chief U.S. economist at UBS, said that the level of nonfarm payroll employment at the end of 2022 was likely too high by several hundred thousand, and that the overstatement might have carried into 2023. “The residual net birth-death adjustment may be the most likely culprit,” but it is also possible the sample of companies that go into the payroll report isn’t representative of what is going on in the labor market at large, he said.

Meanwhile, the household survey is worth watching, said LaVorgna. The employment decline it showed in May could be noise given gains in the prior two months, and the series is prone to swings. But three months of declines “would signal to me that the labor market is at an inflection point and we are now truly shedding jobs,” he said.