Wall Street banks brace for downward revision of up to 1M fewer jobs — fueling worries the Fed failed to slash rates on time

The federal government is poised to reveal that the US economy created as many as a million fewer jobs than previously thought in the 12-month period that stretched through the end of March.

The Bureau of Labor Statistics is expected to announce a significant downward revision of job growth statistics on Wednesday — a development that could fuel the perception on Wall Street that the Federal Reserve has waited too long to start slashing interest rates.

Experts at Goldman Sachs and Wells Fargo are predicting that the preliminary benchmark revisions on Wednesday will show that the economy created between 600,000 and 1 million fewer jobs than what was reported, according to Bloomberg News.

Economists at JPMorgan Chase foresee a downward revision of around 360,000.

A downward revision of more than 501,000 would be the largest in 15 years.

Traders will focus on comments by Fed Chair Jerome Powell on Friday at the Kansas City Fed’s Jackson Hole economic symposium for any new clues on the likely size of a rate cut next month, and whether reductions in borrowing costs are likely to happen at each subsequent Fed meeting.

The Fed has kept its benchmark interest rate high in recent years in hopes of bringing inflation down to its target of 2% without tipping the economy into a recession.

But a downward revision that would indicate a weakening job market will likely prompt critics of the central bank — which pointed to the robust labor market as one of the reasons to maintain its tight monetary policy — to argue that it waited too long to slash rates.

“A large negative revision would indicate that the strength of hiring was already fading before this past April,” Wells Fargo economists Sarah House and Aubrey Woessner said in a note last week.

That would make “risks to the full employment side of the Fed’s dual mandate more salient amid widespread softening in other labor market data.”

The latest BLS figures show that the US economy added 2.9 million jobs in the 12 months beginning in March of last year. That comes out to an average of 242,000 jobs per month.

A downward revision of 1 million would knock the average of monthly jobs created to around 158,000.

“That’s why I think that the market is still pricing in about a 25% chance of a 50-basis-point cut in September,” Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, told Reuters.

“People thought the Fed was behind the curve in raising rates, and now many people think the Fed is behind the curve in cutting rates.”

In June, BLS published data in its Quarterly Census of Employment and Wages (QCEW) which suggested that payrolls may have grown about 60,000 less per month on average last year.

Data showing the job market was weaker than previously thought could increase concerns the US economy is facing a potentially worse downturn than the current expectation for a “soft landing” in which inflation is tamed without a recession.

Earlier this month, stocks plunged after a weaker-than-expected July jobs report which showed that hiring slowed substantially more than forecasters anticipated.

The July jobs report also showed that unemployment ticked up for the fourth consecutive month — stoking fears among economists that a recession was in the offing.

But the Dow, Nasdaq and S&P 500 have recovered from those losses.

“Markets, having recently experienced a growth scare that led to concerns that the Fed is behind the curve, will be monitoring Wednesday’s release of the benchmark revision to see if the market’s initial reaction was, in fact, correct,” Quincy Krosby, chief global strategist at LPL Financial, told Bloomberg News.

Traders in early August aggressively priced for imminent rate cuts after weaker-than-anticipated job growth and an unexpected increase in the unemployment rate in July raised concerns about a possible recession.

A 25-basis-point rate cut in September is seen as having about a 75% probability, according to CME Group’s FedWatch Tool.

Traders are pricing in around 220 basis points of cuts by the end of 2025.

A slim majority of economists polled by Reuters expect the Fed will cut interest rates by 25 basis points at each of its remaining three meetings of 2024.

The Fed is also due to release the minutes from its July 30-31 meeting on Wednesday.

With Post Wires