When Bad News is Not So Bad - Ahead of Wall Street

Wednesday, June 5, 2013

This morning’s jobs report from Automatic Data Processing (ADP) this morning was clearly off the mark. The ADP miss today means that estimates for Friday’s government non-farm payroll report will likely come down. Markets likely wouldn’t mind the soft ADP report in that hopes that an underwhelming labor market will keep the Fed from pulling back on its bond-purchase program. From this Fed-centric perspective, bad economic data seems not that bad to investors.

The ADP report shows a total of 135K private sector jobs in May vs. consensus expectations of 170K. The April tally was revised lower -6K to 113K. This report is expected to serve as a preview of the non-farm payroll report from the government’s BLS coming out on Friday. The consensus expectation is for ‘headline’ BLS gains of +175K, though a straight extrapolation from today’s ADP report would mean a ‘miss’ on Friday. We should keep in mind, however, that the ADP report has undershot the BLS report in each of the last three months.  

Small businesses, with employers having less than 50 employees, added +58K jobs in May. Medium-sized businesses (less than 500 employees) added +39K jobs in May, while large businesses (1000+ employees) added +39K jobs during the month. Weakness in the small-business group is the most pronounced, with some anecdotal evidence that changes to healthcare mandates may be having an impact on hiring trends in that space.

The goods-producing sectors added +3K jobs in May, with gains in construction offset by weakness in the manufacturing sector. This is in-line with what we saw in the May manufacturing ISM report on Monday, which showed the factory space in contraction territory (index reading of below 50). Most of the May jobs came from the services-providing sectors, with gains on that side at 138K. We will get the service sector ISM report a little later.

The ADP report has proved a less than reliable predictor of the government's BLS reading in recent months and this morning's report may continue with that track record. But if that is not and the Friday number comes on the strong side, then the odds of the taper announcement coming out of this month's FOMC meeting will significantly increase. We will have to wait till Friday to find out, but markets can take a sigh of relief today.

Sheraz Mian
Director of Research

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