Today's strong ADP report does not necessarily mean a strong employment report too
Today’s strong ADP report needs to be read with a large pinch of salt if using it to forecast this Friday’s employment report.
Today’s strong ADP report needs to be read with a large pinch of salt if using it to forecast this Friday’s employment report. Although today’s ADP reading of 324k comfortably exceeded market expectations for a 190k print, the relaunch of the ADP survey last summer using revised methodology has rendered it a very unreliable indicator of the official first estimate of the payrolls numbers each month. Errors when comparing to the payrolls number have ranged from a 234k undershoot in January to a 112k overshoot in April, and in aggregate since last September, when the new methodology started to be used, the ADP has underestimated the payrolls number by 427k. Accordingly, there is no way of knowing whether today’s ADP print represents a catch-up in the two series or is a signal that Friday’s payrolls number will similarly exceed expectations. Assuming that the ADP methodology is not systematically biased to the downside, then at some point you would expect to see stronger readings as the gap between both data series was narrowed, and suggesting current expectations for Friday's report should remain unaltered.
Information on the labour market from other sources continues to paint a somewhat gloomier picture than that suggested in today's number. Yesterday’s ISM report showed companies starting to reduce the size of workforces to match lower production levels, while in a similar vein the NFIB survey continues to show hiring intentions declining. On the other side of the fence is the Homebase report, where the release of the recent July numbers showed a still buoyant labour market.
In summary, the true underlying strength of the US labour market remains uncertain and the numerous measures available of it continue to paint a confusing picture. Our own forecast is that a material slowdown in both employment levels and earnings growth will become more evident as the impact of the Fed’s monetary tightening - and the more restrictive credit conditions arising as a consequence of the banking crisis - start to be felt. Accordingly, while expectations of Friday’s payrolls number will undoubtedly now be revised higher, there is more than one good reason for suggesting an element of caution is applied to any such upwardly revised forecasts.