Author: Zhao Ying, Wall Street Insights

The U.S. Bureau of Labor Statistics (BLS) will release the delayed January non-farm payrolls report tonight, along with annual benchmark revisions and methodology updates. The market expects this revision to wipe out about 1 million jobs, which is one of the largest downward revisions in the history of U.S. employment statistics.

Employment growth between April 2024 and March 2025 will be revised downward by 750,000 to 900,000 jobs, according to preliminary BLS estimates. In addition, the BLS will update its corporate birth-death forecast data for the period April to December 2025, which predicts that another 500,000 to 700,000 jobs will be lost. This means that as many as 1 million of the jobs in the non-farm payrolls data as of December 2025 actually never existed.

On Wednesday, according to ZeroHedge and related analysis, this correction will significantly change the actual situation of the U.S. labor market. The revised data will show that the labor market fell below the "stall line" as early as mid-2024, when the three-month moving average job growth was only 55,000, well below the 180,000 needed to keep the unemployment rate stable. On a seasonally adjusted basis, employment growth will be negative for at least five months in 2025.

The core of this adjustment is that BLS finally decided to fix its controversial "birth-death adjustment" model. This model previously failed to accurately eliminate data on "fake companies" generated to obtain PPP loans during the epidemic, resulting in long-term distortion of employment statistics. The new calculation method will introduce real-time sample information. Although it will help improve data accuracy in the long term, it will lead to sharp repricing of employment data and higher monthly volatility in the short term.

This "million-level" negative correction is expected to have a direct impact on monetary policy. With the labor market showing a grimmer picture than expected, the pressure on the Fed to cut interest rates will increase significantly. Market analysts believe that this situation, similar to the sharp downward revision of data in August 2024, will force the Federal Reserve to take action to support the fragile economic recovery. It is currently expected that the Federal Reserve may cut interest rates by 100 basis points this year.

Double downward revisions are superimposed, and the correction amplitude may exceed one million

The report released today will include two levels of downward revisions. First is the regular annual basis revision, in which the BLS will adjust employment data from April 2024 to March 2025 based on the more comprehensive Quarterly Census of Employment and Wage (QCEW) data. Preliminary BLS estimates show job growth for the period will be revised down by 911,000 jobs, but the final downward revision is likely to be slightly smaller, expected to be between 750,000 and 900,000 jobs.

Second, the BLS will apply updated corporate birth-death forecasts and reestimated seasonality factors for the period April through December 2025. This part of the adjustment will incorporate the latest information from the QCEW and monthly employment surveys, and is expected to be revised downward by another 500,000 to 700,000 jobs.

According to Bloomberg economist Anna Wong's estimate, employment will decrease by 3.025 million on a non-seasonally adjusted basis. But as the BLS will reestimate the seasonal adjustment factor to reflect baseline revisions and birth-death model updates, this uncertainty could send the employment data swinging by 40,000 in either direction.

In addition, due to disruptions caused by the government shutdown, the BLS has postponed the annual population control adjustment usually released in the January employment report to next month's February report. Wong expects the adjustment to reduce population levels by at least 700,000, suggesting a further negative revision next month.

The "birth-death" model faces major adjustments

The Birth-Death model is originally a reliable statistical adjustment tool for estimating employment changes in new businesses and failed businesses that are not covered by monthly surveys. But the model turned out to be the biggest statistical hole in the jobs report in the wake of the pandemic.

The root of the problem is PPP (Paycheck Protection Program) loan fraud during the epidemic. Thousands of fake "new companies" were created to take advantage of the free government money doles, which seriously distorted the underlying statistics of corporate birth rates. Because the birth-death model relies on historical patterns of business births and deaths for its predictions, this unusual wave of spurious business creation causes the model to systematically overestimate actual job growth.

This flaw has triggered multiple large downward revisions over the past few years. In August 2024, the BLS revised down 818,000 jobs. This revision became one of the basis for the Federal Reserve to start a sharp interest rate cut cycle, although inflation was still maintained at 3% at that time.

Beginning with this report, the BLS will implement a key methodological change: the inclusion of current sample information on a monthly basis in the birth-death model. Although this move can reduce the magnitude of future annual revisions, it also brings a side effect-the volatility of monthly non-agricultural data will increase significantly. This means that future employment reports may more frequently appear "outliers" that deviate from market expectations, thereby exacerbating overall volatility in financial markets.

The labor market has already cooled, and pressure from the Federal Reserve to cut interest rates has increased sharply

After removing statistical noise, the true cooling path of the U.S. labor market becomes clear. Analysis by Bloomberg Economics showed that revised seasonally adjusted data showed that the labor market had lost momentum as early as the summer of 2024, when the three-month moving average job growth was just 55,000, well below the 180,000 that analysts believed was needed to keep the unemployment rate stable.

In addition, hiring activity has further cooled down due to the impact of Trump’s announcement of tariffs and the subsequent government shutdown. The data shows that job growth will actually be negative for at least five months in 2025, after accounting for seasonal adjustments and revisions. Although the re-estimation of seasonal adjustment factors may introduce an error of about 40,000 people, the overall trend points to a significant deterioration.

This large-scale data revision will reshape market expectations for the Fed's policy path. Just as the sharp downward revision in August 2024 prompted the Federal Reserve to aggressively cut interest rates by 50 basis points two months before the presidential election, the "serious" labor market conditions revealed this time will once again serve as a catalyst for interest rate cuts.

Although some believe that the labor market has bottomed out and begun to recover slowly in mid-2025, the foundation for recovery remains fragile. Combined with the upcoming January CPI data, which may be moderate, the window for the Fed to cut interest rates is opening. Analysts pointed out that in order to deal with the economic weakness reflected in the revised data,the Federal Reserve will not only need to cut interest rates this year, but it may be as much as 100 basis points to prevent the labor market from deteriorating further.