US ADP Employment Change July Preview: Following the high frequency data

Hiring at American companies in July is forecast to slow as firms scale back plans as they wait for the economic impact of the second wave of the Covid cases in several large US states.

Private payrolls from Automatic Data Processing (ADP) are forecast to have gained 1.5 million workers last month down from the 2.369 million increase in June and 3.065 million in May.  All told US companies serviced by ADP have recouped 28% of April’s record 19.409 million lost jobs.

ADP payrolls

Employment indicators: initial claims and PMI

Improvement in initial jobless claims stalled in the first week of July at 1.310 million after 18 weeks of reductions. The following week claims fell marginally to 1.307 million and in the subsequent two weeks they rose to a one month high of 1.434 million. 

The July 31 number due on Thursday is forecast to be 1.4 million.  If accurate that would mean that the rate of weekly layoffs has held constant for six weeks and that an additional 6.881 million people have lost their jobs since the beginning of July.

Initial jobless claims

Likewise the recovery in the manufacturing purchasing managers employment index (PMI) has not kept pace with the rest of the sector. 

The rise in the overall index from its April low of 41.5 to 54.2 in July has been faster and stronger than expected.  Sentiment and activity are now firmly above the 50 division between expansion and contraction.

The improvement in new orders from 27.5 in April, an all-time low, to 61.5 in July has been the fastest rise in the series history.

Employment however at 44.3 in July remained below 50 and in contraction where it has been for 12 months.

Manufacturing employment PMI

It may be that the longer lead times in manufacturing and the normal hiring caution is responsible for the reluctance or it may be that managers are waiting to see the outcome of the second wave of the virus before adding personnel.

ADP and NFP

Some 500,000 US companies are ADP’s clients and their payrolls closely represent the private sector portion of the Employment Situation Report from the Labor Department, commonly known as non-farm payrolls for its most cited statistic.  

National employment figures include two categories not covered in ADP’s private report—government workers at federal, state and local levels and the number of new jobs created each month but not yet reported to authorities estimated by the so-called ‘birth-death model of the Bureau of Labor Statistics.

Markets and conclusion

The second wave of Covid cases, while producing far less illness, hospitalizations and fatalities than the first has forced a number of states to suspend reopening plans and in some to reintroduce partial business closures.

These limitations have instilled a slowdown in some high frequency data, restaurant visits and travel for instance, from the rapidly expanding rates earlier in June and have stalled initial claims at 1.37 million.

 This data has convinced economists that hiring slowed substantially in July.  That expected decline in returning employment and the potential Fed rate response were one of the chief reasons behind the three week swoon in the US dollar.

If ADP is as expected or worse the dollar’s weakness will be reinstated. If the anticipated slowdown in hiring does not occur, short dollar positions will suddenly be a good deal less valuable.