The U.S. economy added 306,000 fewer jobs than previously estimated in the year through March 2023, the Labor Department reported Wednesday. The S&P 500 climbed in Wednesday stock market action as the 10-year Treasury yield pulled back from recent heights ahead of Federal Reserve Chair Jerome Powell's big speech on Friday.
Separately, S&P Global's preliminary read on U.S. economic activity hit a six-month low in August as service-sector and manufacturing firms both saw business slow.
With investors looking ahead to Powell's speech at the Kansas City Fed's annual monetary policy conference in Jackson Hole, Wyo., Wednesday's data may have lowered the stakes a bit, by making a soft landing seem more attainable.
Fed Chair Powell At Jackson Hole: Here's The Real Risk For The S&P 500
S&P Global Survey Data
S&P Global's flash U.S. composite output index fell to 50.4 in August, just above the 50 neutral level, from 52 in July. The services activity index slipped to 51 from 52.3, also a six-month low. The manufacturing output index dipped back into contractionary territory, falling to 47.5 from 50.2.
In discussing the service-sector slowdown, S&P noted that "high interest rates and inflationary pressures were seen to have weighed on customer spending."
BLS Preliminary Benchmark Revision
The Bureau of Labor Statistics issued a preliminary revision for March 2023 data showing job growth for the prior year was overstated by 306,000, including 358,000 private-sector jobs.
The revision, which won't be finalized until February, would eliminate 7.5% of the reported 4.05 million addition in nonfarm jobs over the year through March. The reported 3.56 million in private-sector job gains would be cut by 10%.
The data update came as the Labor Department released its Quarterly Census of Employment and Wages, or QCEW, for the first quarter of 2023. The revision is based on QCEW data that reflects state unemployment insurance tax records covering more than 95% of all U.S. jobs. That enables much more comprehensive counts than monthly surveys based on a sample of employers.
The revision only explains part of an ongoing labor market puzzle. In the 17 months of data since March 2022, Labor Department numbers based on a monthly survey of employers shows that the U.S. economy has added about 4.9 million jobs. Yet the separate monthly survey of households that yields the jobless rate shows that roughly 2.9 million people have gained employment over the same period.
The two surveys don't measure quite the same thing. For example, if a worker gets a second payroll job, that adds to the employer survey total but not to the household survey. Still, the disparity had led some to question whether government estimators are overstating job growth.
Now we know there has been some modest overstatement, adding up to roughly 30,000 private-sector jobs per month over the year through March. The question now is whether the overstatement has continued in recent months.
Federal Tax Receipts Slow
The discrepancy in job gains seen in the employer and household survey data wasn't the only reason for expecting the Labor Department to downgrade the past year of job gains. In a research note last week, Deutsche Bank senior U.S. economist Brett Ryan wrote, "the QCEW could point to a somewhat weaker trend in income growth relative to what the monthly employment report" has shown.
Ryan points out that the trend in income growth implied by QCEW data usually correlates pretty well with growth in federal income and payroll taxes withheld from worker paychecks. A chart included in Ryan's analysis shows that withheld taxes are running slightly negative from a year ago.
For the fiscal year starting in October, the government has collected $2.55 trillion in withheld taxes, down from $2.57 trillion at the same point in 2022, Treasury Department data shows.
By contrast, Labor Department data from the employer survey shows that aggregate weekly pay for all private-sector workers is running about 6% higher than a year ago.
Are Bank Woes Hitting Hiring?
An IBD analysis finds that withheld taxes collected from mid-April through mid-August rose just 0.6% from a year ago, raising a possibility that recent hiring has also been overstated.
Withheld taxes can vary based on the size of year-end bonuses, sales commissions and vested stock options. A big jump in the standard deduction at the start of 2023 also has likely held down receipt growth to an extent. All that makes the data somewhat unreliable for making forecasts.
The Labor Department's overestimate of job growth may be because of faulty estimates for the net job impact of firm births and deaths each month. Jobs reports have shown that a boom in new business starts continued through 2022 and into 2023. The last few reports have started to show some moderation.
A key question is how financial conditions overall and the regional banking crisis in particular have tightened lending and slowed small-business job growth.
Why The Fed Needs A Soft Landing
Recent data from the Federal Reserve shows that bank deposits continue to sink with savers able to earn 4% to 5% or more via Treasuries and money market funds.
On Monday, S&P Global cut its credit ratings for multiple regional banks, citing higher funding costs, deposit outflows and commercial real estate exposure. Among downgraded banks were Comerica, KeyCorp, UMB Financial, Valley National Bancorp and Associated Banc.
The ongoing outflow of deposits and looming commercial real estate issues raise the stakes for the Federal Reserve to engineer a soft landing for the economy. The alternative — a no-landing scenario that sees the 10-year Treasury yield continue to rise — seems bound to produce serious turbulence before too long.
That's why serious downward revisions to reported job growth is good news for the Fed and positive for the S&P 500 — especially if job growth over the past several months also has been overestimated. That would make a soft landing seem more attainable, helping to stem the recent rise in the 10-year Treasury yield.
Downward revisions to prior job growth probably won't be enough to lead Federal Reserve Chair Powell to adjust his characterization of the "strong" labor market in his speech on Friday morning starting at 10:10 a.m. ET.
S&P 500 Bounce Fades
On Wednesday, the S&P 500 rallied 1.1% in early afternoon trade, clearing the top of Tuesday's trading range that came before a surging 10-year yield undercut momentum. The S&P 500 is trying to stage a rally after falling for three straight weeks for the first time all year.
On Wednesday, the 10-year Treasury yield pulled back to 4.21% from 4.33% on Tuesday, when it briefly hit the highest level since early 2008.
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