ADP Employment Preview: Consensus accuracy

• New employment forecast to recover but below trend
• June weakness in ADP in contrast to strong NFP
• Average consensus estimates very accurate this year

Automatic Data Processing (ADP) the private payroll company will release its National Employment Report on Wednesday, July 31^st at 12:15 GMT, 8:15 EDT.

Forecast

The payrolls supervised by ADP are predicted to add 150,000 new workers in July after an increase of 102,000 in June and 27,000 in May.

ADP and NFP

The ADP report is an early indicator for the Bureau of Labor Statistics (BLS) Employment Situation Summary usually called payrolls or NFP for its most widely quoted statistic.

The Bureau of Labor Statistics report for June will be released on Friday August 2^nd at 12:30 GMT, 8:30 EDT.

The NFP report is the best known US economic statistic. Its labor market information cover payrolls, wages, unemployment, labor force participation average work week and other topics. It is and has been for many years the most followed and traded US economic statistic.

The BLS information is organized into numerous categories--private and government payrolls, type of employment, age, racial and gender differentiated unemployment rates and many alternatives. In all the BLS report contains 25 different tables of employment statistics.

ADP and NFP: Part and Whole

There are two main differences between the reports. The ADP information covers only the payrolls of the 411,000 US firms that employ its statistical and accounting services. The BLS report covers the entire economy including government employment at local, state and federal levels.

The second difference is that ADP only counts actual new employees whose paychecks are processed by the company.

The NFP figures from the BLS include a monthly estimate for the number of jobs created by newly formed companies that have not yet been reported to the government. This estimated number produced by the so-called birth-death model is later revised to the actual tax rolls and the NFP figures are adjusted each year to correct for the variation.

NFP and ADP Trends

The strong job growth depicted in both reports has moderated this year.

The 3-month ADP moving average has dropped from 244,000 in February to 133,000 in June, the primary culprits being May and June at 41,000 and 102,000. The 12-month average has slipped from 220,000 in February to 192,000 in June.  The 150,000 forecast for July falls between the two averages.

Reuters

The NFP averages have moved in similar fashion. The 3-month has decreased form 245,000 in January to 171,000 in June with the 12-month dropping in the same months from 235,000 to 192,000.

Reuters

There was considerable angst before the June NFP was reported on July 5^th that the May number, much weaker than expected at 75,000 (later revised to 72,000) combined with the two poor ADP reports in May and June at 41,000 and 102,000 were a clear sign that the labor market was shifting to a lower gear.

The actual June NFP result of 224,000 put that notion to rest, at least temporarily. 

ADP and NFP: Consensus vs Actual

Interestingly, despite the large monthly volatility in the job numbers from ADP and the NFP figures from the BLS, the monthly economic consensus forecasts for both have been stable and remarkably accurate.

The ADP average prediction for this year has been 172,833 with a range of 140,000 to 189,000.  The six month average of the actual statistic is 173,333 and the range is 41,000 to 264,000.

FXStreet

For the NFP the consensus average prediction has been 175,833, with a range of 160,000 to 185,000. The first half average has been 172,666 with a range of 56,000 to 312,000.

FXStreet

The month to month variation in both numbers notwithstanding, the trend in both figures has been stable and predictable. It’s enough to make the analysts look positively sagacious.

The Labor Market and the US Economy

American economic growth has slowed from 3.1% annually in the first quarter to 2.1% in the second. That slowdown was due largely to two factors, a drop in inventory accumulation in the second quarter and a 5.2% fall in exports, which is counted against GDP by the Bureau of Economic Analysis. It was estimated that if the inventory build in the first three months of the year had continued in the second ADP would have come in at 3%.

The decrease in GDP has not affected the labor market. 

The NFP average for January, February and March was 173,666, for April May and June it was 170,666. The unemployment rate average in Q1 was 3.87%, in Q2 it was 3.63%.  The 4-week moving average for Initial jobless claims was 222,333 for the first quarter and 216,625 for the second.  

The factors that drove GDP lower in the just ended quarter were external to hiring decision particularly since revived consumer spending in the second quarter dissipated the inventory build of the first, promising greater production in the months ahead.  In the latest Beige Book produced by the Federal Reserve for the FOMC meeting on Wednesday many districts reported shortages of labor, especially in skilled trades.

Hiring sentiment among employers remains solid if not as effusive as last year.  The ISM manufacturing employment index averaged 55.1 in the first quarter and 53.5 in the second. The services employment index was 56.3 in quarter one and 55.6 in quarter two.

Conclusion

The labor market remains stable and productive. None of the attendant statistics, initial jobless claims, the unemployment rate or employment sentiment numbers indicate any change in the outlook for job creation. The US China trade standoff has engendered a great deal of concern in executive suites but little of that, as yet,  has worked its way into hiring decision on the shop floor.  

The ADP numbers should portray the continuing success of the current economy.