Wednesday, August 5, 2015
Stocks appear on track to start today’s session in the green, with the soft(ish) labor market reading from ADP (ADP) likely impacting expectations for the government jobs report on Friday. Labor market readings are particularly important at present as they are believed to be key to the Fed’s decision to start the rate hiking process next month or delay it to a later date.
The ADP jobs report came short of expectations. This monthly labor market reading from the largest payroll processor in the country serves as a preview for the all-important monthly non-farm payroll report from the U.S. government’s Bureau of Labor Statistics. The ADP read shows gains of 185K in July relative to estimates of 210K and the prior month’s 229K gain (prior month revised down from 237K). This report could put downward pressure on estimates for Friday’s BLS report, which currently stand at 212K, per Bloomberg.com.
The July gains were concentrated in the service sector of the economy, with the bulk of the jobs coming from small and medium-sized employers. In the aggregate, the services providing industries added 178K in July while goods-producing industries added only 8K. The Construction industry had another good month, adding 12K positions during the month, while manufacturing added only 2K jobs in July. The construction strength is in-line with what we have been seeing in other housing related readings like housing starts and new home sales numbers.
The service-sector ISM survey coming out a little later will likely reconfirm the continued momentum on the service side of the economy, though the tepid manufacturing sector results are in-line with other readings of the sector, as was the case in Monday’s manufacturing ISM survey. In terms of business size, large businesses (500 or more employees) added 64K jobs, medium-sized businesses added 62K, while small businesses with less than 50 employees in total added 59K jobs.
On a month-to-month basis, the ADP report can be out-of-sync with the corresponding government jobs report, but the two reports do move together in the long run. Both reports showed the labor market losing steam in Q1 as the economy lost momentum, but we saw a pick-up in both reports in Q2 and hat trend appears to have continued in the current period as well. Today’s reading a bit on the disappointing side, but not in any meaningful way; it still remains largely within the monthly rage over the last 12 months.
The key takeaway from this and other economic readings from the Fed perspective is that the economy is on firm enough grounds to enable them to start the tightening process from the September FOMC meeting. Unless we see a disappointing BLS jobs report this Friday, a September lift-off is very much on the table.
Sheraz Mian
Director of Research
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