US ADP Employment Preview: Beware negative trends

• Private payrolls to drop to below trend
• ADP figures have been volatile this year
• NFP and ADP averages have declined this year

Automatic Data Processing (ADP) the private payroll company will issue its National Employment Report on Wednesday October 2^nd at 12:15 GMT, 8:15 EDT.

Forecast

The firms using ADP’s payroll services are estimated to employ 140,000 new workers in September following the hiring of 195,000 in August and 156,000 in July.

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ADP and NFP

The importance of the ADP report is tied to the Bureau of Labor Statistics (BLS) Employment Situation Summary usually known as non-farm payrolls of NFP for its widely quoted central statistic.

The ADP figure is issued on the Wednesday (occasionally Thursday) before the monthly NFP report which is due on Friday October 4^th at 12:30 GMT, 8:30 EDT.

The NFP report is the most widely known and cited labor statistic and one of the most pertinent figures on the US economy. It contains the broadest assessment of the American labor market with nationwide figures on job creation and payrolls, wages, unemployment, labor force participation, average work week and other topics.

The US economy is consumer based with about 70% of activity tied to consumption. The health of the economy closely follows the success of the labor market.

NFP and ADP whole and part

The ADP report is essentially the private payroll statistic of the NFP information writ small.

There are three basic differences between the reports.

The ADP payroll figures come solely from the company’s approximately 411,000 US clients. They represent but do not encompass the US labor market.  The BLS report is nationwide, including all government employment at local, state and federal levels.

The ADP report covers payrolls, nothing more. The BLS survey is a full labor market assessment charting many types of information including unemployment rates, wages, length of the work week, labor force participation and several others.    

The BLS information is divided into many categories--private and government payrolls, type of employment, age, racial and gender specified unemployment rates and more. In all the BLS report contains 25 different tables of employment statistics and presents the most comprehensive picture of the US labor economy.

The final difference is that ADP is strictly factual. The jobs number is generated from payrolls processed by the company, that is it is limited is to new workers who are receiving paychecks.

The BLS non-farm payroll figure includes an estimate of the number of jobs created by new companies, usually small businesses that have not interacted with the government.  

This projection is generated by the so-called birth-death model, referring to the creation and demise of new businesses, and is later compared to the tax rolls and revised. The NFP job figures are adjusted each year in their annual benchmark revisions to bring the estimated version of created jobs into line with the reality of company payrolls. In the past this yearly adjustment has been 500,000 or more.

NFP and ADP trends

The rate of US job creation has slowed from 2018’s blistering pace.

For ADP the 3-month moving average has declined from 244,000 in February to 151,000 in August.

The NFP average has followed suit. The 3-month has dropped from 257,000 in January to 173,000 in August.

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Both statistics have witnessed substantial volatility since January. The ADP figures slipped substantially below this year’s 160,000 average on three occasions, March 129,000, May 27,000 and June 102,000.  The clustering of these weak numbers brought about speculation that job creation was fading.  The revival to 156,000 in July and 195,000 in August ended the immediate worry.  

The 172,000 NFP average this year was missed by more than 30,000 twice, 20,000 in February and 75,000 in May. The coincidence of poor ADP and NFP in May was the high point for labor market concerns.  Since then NFP, like ADP has reverted to trend.

Business sentiment and the labor market

The trade dispute with China has sapped American business optimism.  The purchasing managers’ indexes from the Institute for Supply Management for the manufacturing and service sectors are now well below their 2018 peaks.

Manufacturing PMI has fallen from 60.8 in August 2018 to 49.1 in August and 47.8 in September. This is the second month below the 50 division between expansion and contraction, and the lowest reading since June 2009.  

Reuters

Sentiment in the much larger service sector has fallen from 60.8 in September 2018 to 56.4 in August, having bounced from July’s two year low of 53.7.  The September figure will be released on Thursday a decrease to 55.0 is expected.

Conclusion

The plunge in business sentiment has begun to affect the labor market.

The NFP and ADP averages for job creation have dropped noticeably this year.   The key and likely reason that the decline in new hires has not yet affected overall consumer spending is that the level of job creation is still above the number of new entrants to the labor market. When combined with the backlog of unfilled positons from the last two years, the shortage of labor in many areas is sufficient to push wages higher and keep the job market buoyant.   That happy situation, however will not last forever if businesses continue to lose faith in the immediate economic future.