ADP Payrolls and ISM show healthy US economy

• Private payrolls almost double estimates at 291,000.
• Services PMI better than forecast, new orders gain.
• U-3 unemployment rate likely understates slack in the labor market.

Employment started the year with a bang as the first major jobs report nearly doubled its forecast and confidence in the dominant service sector rose to its best level since August.

Private payrolls from Automatic Data Processing (ADP) added 291,000 positions in January in the highest monthly total since May 2015, far above the 156,000 predicted by economists in the Reuters survey.  The increase follows December’s strong gain of 199,000 which was revised lower by 3,000 and suggests that though the unemployment rate of 3.5% is a five decade low, there is still labor slack in the economy.

ADP Payrolls

FXStreet

Activity in the 70% of the US economy engaged in the services industries climbed more than expected in January as new business improved and prices cooled.

The non-manufacturing purchasing managers’ index from the Institute for Supply Management came in at 55.5 last month, up from 54.9 in December and better than the 55 median estimate.   The index for new orders edged to 56.2, lower than the 58 forecast but up from December’s 55.3.  The employment index unexpectedly dropped to 53.1 from 54.8, missing the 55.2 forecast.

Non-Manufacturing PMI

FXStreet

 

This report follows the manufacturing edition on Monday that showed a rebound in the factory sector index to 50.9 in January, putting it above the 50 division between expansion and contraction for the first time since last July.  The index of new orders jumped to 52 from 47.6 in December, also the first positive reading since July.  Manufacturing industries are about 12% of the US economy.  Employment rose to 46.6 from the four year low of 45.2 in December.

Manufacturing PMI

FXStreet

These statistics may represent the first benefits of the US-China trade pact signed on January 15^th in Washington which reduced tensions between the world’s two largest economies. The agreement exchanged Chinese agricultural purchases and technology liberalization for the elimination of a planned US tariff and the reduction of others.

Improvement in the Chinese economy and probably the US manufacturing sector in the months ahead will depend on the extent of damage inflicted on the mainland from the corona virus which has shuttered Chinese cities and is expected to disrupt global supply chains for many factory products, particularly electronics.

These reports come two days before the Labor Department’s non-farm payrolls, which is an accounting of all employment across the country, not solely in the private sector.  US firms are expected to have added 160,000 new positions in January, slightly under the 176,000 monthly pace last year though better than the 145,000 in December.  Unemployment is forecast to be unchanged at 3.5%.

The US economy expanded at a 2.3% annual pace in 2019, after running at 2.9% in 2018.  Job creation declined from 223,000 a month in 2018 to 176,000 last year. 

The ability of firms to find new workers despite the 50 year low in the unemployment rate of 3.5% probably stems from the large numbers of potential workers not captured by the stringent requirements of the commonly quoted U-3 rate. This gauge requires an individual to have looked for work in the month prior to the survey to be counted as unemployed.  A wider measure, the U-6 rate stipulates a search anytime in the prior year and was 6.7% in December. 

Reuters

Another gauge which measures worker involvement in the economy is the labor force participation rate which has fallen sharply since the recession.  In June 2009 it was 65.7. For the next six years it moved steadily lower reaching a 38 year low of 62.4 in September 2015.  

The decline is partially the result of the natural aging of the US population as older people work at lower rates but there was likely a discouragement factor at play as well, especially in the immediate aftermath of the financial crisis when employment in many fields was very hard to find.  

Reuters

 

The rise in the labor force participation rate from 62.7  in January 2018 to its current 63.2 is evidence that with the excellent availability of work and several million unfilled jobs, many long-unemployed  workers have been able to find positions.