- ADP was stronger than expected, but recent pattern suggests it is catching up to past BLS gains.
- ADP removes some downside risk to tomorrow's BLS report.
- Dollar firmed and 10-year yields ticked up.
- Data reinforces sense that Q1 GDP contraction does not truly reflect US economic activity.
The ADP estimate for private sector job growth came in at 281k, the strongest since November 2012. It follows an unrevised 179k in May. Investors will be tempted to revise up their expectations for tomorrow's non-farm payrolls. The Bloomberg consensus stood at 215k prior to the ADP report.
On a month-to-month basis, there are notable discrepancies. For example, in November 2012, when the ADP estimated, the BLS figures showed private sector employment rose 211k Initially (before revisions), that month ADP's estimate was 118k and the BLS estimate was 147k. As we noted earlier, over the past 12 months, the average monthly gains of both time series were almost identical, but during the past three months, the ADP estimate lagged behind the official estimate by a little more than 30k.
There are two ways to interpolate from the ADP report. The first is to assume that it is still under-estimating the official report. Add the 30k average ADP under-estimate to the 281k report today, to get 311k rise in non-farm payrolls. The second is to see the stronger ADP report as playing a bit of catch-up. The 3-month average now stands at 222k. The 3-month average private sector job growth, according to the BLS, is 229 through May.
On balance, the second scenario seems more likely. A little more than 40% (117k/281k) of the private sector jobs that ADP reported were among small businesses, a sector that the BLS methodology does not do a great job picking up. That said, the ADP report likely signals a reduced chance of a significant disappointment with the non-farm payroll report.
We also argue that the shift in the Federal Reserve's forward guidance away from the unemployment threshold and toward a broader assessment of the labor market suggests that the monthly jobs report may not have the oomph that it had in the past. The kind of labor market metrics the Yellen Fed is emphasizing tend not to be volatile. Hourly earnings, for example, typically change only slowly. The same is true of those taking part-time work for economic reasons. To say the same thing, there are no immediate policy implications from the monthly jobs report.
At the same time, another 200k+ increase in non-farm payrolls would extend the streak to five months. This is noteworthy. Such streak has not been recorded since late 1999/early 2000. This, coupled with impressive auto sales figures reported yesterday, should boost confidence that the sharp contraction in Q1 was a bit of a fluke and that it does not reflect the true signal of economic activity. Auto sales in June reached 16.92 mln units at an annualized pace, the best since July 2006. For Q214, the monthly average stands at 16.53 mln units compared with 15.59 mln in both Q114 and Q413.
In addition, the recent housing activity reports, outside of starts, have generally surprised on the upside, including NAHB house index, existing and new home sales. A lead indicator, pending home sales, also was stronger. Household consumption, it is true, has disappointed, but this speaks to a change in the composition of growth not the magnitude per se.
The US dollar has firmed across the board, but the gains remain modest. The dollar is flirting with the 200-day moving average against the yen (JPY101.75). Additional resistance is seen at the trend line drawn off recent highs (~JPY102.00). The euro pushed back to $1.3640, which corresponds to a retracement objective of the bounce since last week's lows. Sterling is irrepressible after the UK's robust data (both the manufacturing and construction PMIs were above expectations). The US 10-year yield has risen a few basis points, weighing on other bond markets, but still below 2.6%, it is hard to get too excited about the ADP data being a game changer.