Could ADP Data Threaten Fed’s Rate Hikes?

When markets participants feel worried about recession, all US data is suspicious. Hot inflation erodes household income. Producer prices are even higher than retail. In the US, where nearly all goods move by truck, diesel fuel hit an all-time record, ensuring inflation will be higher in April and May than it was in March.

Private sector employment increased by 247,000 jobs from March to April according to the April ADP National Employment ReportTM. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is produced by the ADP Research Institute.

The report, which is derived from ADP’s actual data of those who are on a company’s payroll, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. Companies added far fewer jobs than expected in April as the struggle to find workers to fill open positions continued, payrolls processing firm ADP reported Wednesday.

Private payrolls increased by just 247,000 for the month, well below the 390,000 Dow Jones estimate. That was a big decline from March, which saw an upwardly revised gain of 479,000.

A drop-off in small business hiring was the primary culprit for the disappointment, as companies with fewer than 50 workers saw a decline of 120,000. The issue was particularly acute in those with fewer than 20 employees, which lost 96,000 workers on the month.

In April, the labour market recovery showed signs of slowing as the economy approaches full employment. While hiring demand remains strong, labour supply shortages caused job gains to soften for both goods producers and services providers. Big businesses with 500 or more workers compensated for some of the decline, adding 321,000.

Leisure and hospitality businesses led job creation with 77,000 additions. Professional and business services grew by 50,000 and education and health services contributed 48,000 to the total. Information services was the only sector to report a decline, losing 2,000 workers.

In all, services-related industries comprised 202,000 of the total while goods producers added 46,000, led by manufacturing’s 25,000, while construction grew by 16,000. The ADP report serves as a precursor to Friday’s more closely watched nonfarm payrolls count from the Bureau of Labour Statistics.

That report is expected to show growth of 400,000 and a decline in the unemployment rate to 3.5%. If that forecast for the jobless rate is correct, it will match the pre-pandemic level, which was the lowest since December 1969. Payrolls increased by 431,000 in March

March ended with a gap of 5.6 million between open positions and available workers. That has caused wages to spike, though they have still failed to keep up with inflation running at its fastest pace in more than 40 years.

The one bright spot is, somewhat surprisingly, Americans themselves. Consumption is the lifeblood of the US economy and so far, American families have not stopped spending. The biggest reason for that resilience is the red-hot job market. Unemployment is 3.6%. Payrolls have averaged 599,000 for six months and 566,000 for a year. There were more than 11 million unfilled positions in February. Anyone who wants a job can find one.

With the Federal Reserve beginning one of its most aggressive rate cycles in history and inflation running at a four-decade high, how long can American businesses and consumers continue to fund the economic expansion?

Which brings markets to the employment report from Automatic Data Processing (ADP), due on Wednesday, the morning of the Federal Reserve meeting.

The American clients of ADP were expected to hire 395,000 workers in April, which would be about a quarter less than the six-month average. Two days later Nonfarm Payrolls were projected to add 380,000 employees, the lowest monthly total since last April.

The correlation between the private ADP report and the national payroll report is not high. Over the last year the two reports have moved in the same direction seven times and in opposition the remaining five. Nonetheless, any indication of weakness in ADP will be considered a warning for NFP.

The manufacturing Purchasing Managers’ Index (PMI) for employment from the Institute for Supply Management (ISM) displayed unexpected softness in April. The Employment Index plunged 5.4 points to 50.9, its largest single drop since the lockdown month of April 2020. The forecast had been for a smaller decline to 54.7. It was the weakest employment reading in seven months and the closest to the 50-contraction limit.