Fed Chair Jerome Powell pointed on Wednesday to a job-market risk that economists have been worried about for months: Official statistics could be drastically overstating recent hiring.
Powell said that Fed staffers believe that federal data could be overestimating job creation by up to 60,000 jobs a month. Given that figures published so far show that the economy has added about 40,000 jobs a month since April, the real number could be something more like a loss of 20,000 jobs a month, Powell said.
"We think there's an overstatement in these numbers," Powell said.
Published data already show the labor market has slowed significantly this year, down from rapid hiring after the Covid-19 pandemic. This slower pace means big data revisions can more easily reveal the economy is shedding jobs, not adding them.
"It's a complicated, unusual, and difficult situation, where the labor market is also under pressure, where job creation may actually be negative," Powell said.
That concern provided some of the backing for the Fed's decision to cut interest rates at a third straight meeting, Powell said—despite a labor market that still looks healthy on the surface, with unemployment at a relatively modest 4.4% in September and a net gain of 119,000 jobs that month. Next week, the Labor Department will report fresh jobs numbers for October and November, as well as possible revisions for previous months.
Powell's concern involves a quandary that the Labor Department faces when measuring hiring: how to judge the number of jobs added or destroyed when new businesses are created or close down. Those jobs can't be surveyed directly because it's difficult for the government to reach out to brand-new companies or companies no longer in business.
Instead, Labor's data arm, the Bureau of Labor Statistics, must use a statistical model to make a guess. In the past few years, that technique, called the birth-death model—referring to the births and deaths of businesses—has overstated job creation by hundreds of thousands of jobs a year, forcing significant downward revisions later.
Last month, the BLS laid out a plan to change how it uses the birth-death model, which could make the real-time numbers more accurate starting in February. But for now, Powell suggested, the Fed is concerned that monthly employment stats have been too good to be true—part of the rationale for continuing to cut interest rates even though inflation remains above target.
The difficulty with the birth-death model is just one among a handful of problems the BLS has faced in delivering accurate economic statistics on time, and is complicating the Fed's job as it tries to steer an economy facing dual challenges of elevated inflation and rising unemployment.
A falling number of timely responses to the labor surveys has increased the scale of a different set of monthly job-stats revisions, required after some companies hand in their payroll numbers late. A yearslong budget crunch and staffing shortages have also weighed on the agency's capabilities. And, most recently, the extended government shutdown that ended in November set the agency's work back by more than a month.
The Labor Department's struggles have spilled into politics, prompting President Trump to blame data problems on what he called efforts to manipulate figures for political ends. He fired the BLS's commissioner, Erika McEntarfer, after sharp revisions in August ate into springtime jobs growth, leaving the agency in the hands of a nonpartisan career official who is serving as its acting leader.
