Non-Farm Payrolls: ADP and ISM point in different directions

Automatic Data Processing the private payroll company reported that its clients added 275,000 new employees in April far more than forecast and the highest total since last July. Analysts had predicted 180,000 positions.  The March result was revised to 151,000 from 129,000.

The purchasing managers’ index for manufacturing from the Institute for Supply Management dropped to 52.8 in April from 55.3 in March.  It was the weakest reading for the factory sector since October 2016. A much smaller decline to 55.0 had been forecast.  

Reuters

The PMI measure for employment was also unexpectedly weak slipping to 52.4 in April from 57.5. An increase to 55.8 had been projected. The index had fallen to 52.3 in February before rebounding in March.

Both the ADP and ISM employment reports are precursors to the more comprehensive Employment Situation Report from the US Labor Department to be released on Friday at 8:30 am EDT, 12:30 pm GMT.  The median expectation is for 185,000 additions to non-farm payrolls in April following March’s 196,000 gain.

The ADP and PMI reports have a different historical correlation with non-farm payrolls. 

The PMI index is considered a sentiment function.  The survey asks purchasing managers about the tenor of their business, their order flows, hiring plans and about other aspects of their firm.  

Over the past four years payrolls have roughly averaged 150,000 and 250,000 per month.  The PMI employment index has been far more volatile.  In 2015 it declined for almost the whole year, touching a post-crash low of 48. Then in late 2016, after the US election it soared reaching a post-crisis high in 2018. During the three year round trip in the PMI employment index payrolls varied relatively little.  The actual hiring decisions of businesses did not reflect the cycles of pessimism and optimism of the PMI survey.

Reuters

The ADP payroll report is, like the NFP, an accounting compendium. It records real changes in employment, new hires and nothing else.  In fact the NFP is not as rigorous as the ADP because it includes estimates of jobs created at new small businesses that have not yet interacted with the government.    Nonetheless that is a small consideration. The correlation of the ADP and NFP reports is far closer than that of the PMI employment index and the non-farm payrolls.

When in doubt always go with the hard numbers.