By posting the sort of large downward revisions that usually only happen when a recession is at hand, the latest U.S. payrolls data is sparking concerns about the underlying trajectory of the U.S. economy, according to a report from RBC Economics.
While the July employment report attracted more attention than usual — after it was followed by the firing of the head of the U.S. Bureau of Labor Statistics (BLS), sparking concerns about the integrity of future U.S. economic data — the report also raised worries about the health of the U.S. economy.
In a new report, RBC Economics said the revisions to payroll numbers for May and June — a downward revision of 258,000 from previous data showing the economy added 291,000 new jobs in those two months, down to just 33,000 — represent one of the largest revisions on record, apart from the pandemic period.
And the revised data “stirred serious concerns about visibility into and the direction of the U.S. economy,” it said.
“This is not the first time we have seen significant revisions to payroll data, but it is atypical outside of labour market turning points (i.e., recessions),” the report noted.
In this case, the underlying explanation for the weaker job market is likely largely the effect of higher tariffs, but the reason the data was revised so sharply also reflects the methodology and data collection practices used in compiling this data.
“The primary reason why data is revised on a monthly basis is that additional survey responses come in after the initial release,” the report noted.
Initial response rates have been declining in the years since the pandemic, raising the reliance on modelling estimates that are subject to revisions.
“The easiest explanation [for the large revisions in the latest report] is that businesses were slower to respond than usual, leading to a larger share of assumptions being used in the initial data release,” RBC said.
Additionally, slower responses from sectors with larger exposures to trade turmoil likely affected the revisions — as did staffing shortages at the BLS, which may have impacted data collection and processing, the report suggested.
Indeed, “Trade-exposed sectors posted the most pronounced revisions alongside the government sector,” RBC noted — with the manufacturing, retail and business services sectors accounting for some of the largest downside revisions.
While the weakness in employment matches RBC’s expectations for “job losses in trade-reliant sectors resulting from the tariff uncertainty,” the report said the large downward revision also “changes our near-term assessment of the U.S. labour market.”
Looking ahead, “It is likely that downward revisions continue in 2025, especially if initial response rates remain low and we are at a turning point in the labour market hiring trends,” the report said.
If the next payroll report continues to paint a weak picture, with downward revisions to June and July data, this could prompt the U.S. Federal Reserve Board to cut rates next month, RBC noted.
Although the Fed will also see two inflation reports before its next meeting.
“Should we see an uptick in the pace of core inflation, the Fed will be put in a tough spot,” the report said. “A re-acceleration in prices may limit how quickly the Fed can return rates to neutral in the short term.”