US ADP Employment November Preview: For better or worse all roads lead to China

• ADP private payrolls expected to climb in November.
• Revisions subtracted 70,000 from totals over the past six months.
• Weak business confidence the major negative factor.

Automatic Data Processing (ADP) the largest private payroll processing firm in the United States will issue its National Employment Report on Wednesday December 4^th  at 13:15 GMT, 8:15 EDT

Forecast

Employment at ADP’s clients is projected to rise 140,000 in November following gains of 125,000 in October and 93,000 in September.

ADP and NFP: Indicator and source

The ADP payroll accounting is the chief employment indicator for Bureau of Labor Statistics (BLS) Employment Situation Report, normally known as the non-farm payrolls or NFP for its central job creation statistic.

The BLS report is the most widely followed employment assessment for the US economy. Its monthly figures collect information on job creation, unemployment, wages, average work week, labor participation rates and other topics.

The ADP number is issued on the Wednesday before the NFP which the BLS releases on the first Friday of each month covering the prior period.

NFP and ADP: Estimate and fact

While the two reports outline changes in the same labor market, the ADP information covers only those private sector firms who use its payroll services. The BLS survey measures the entire US economy.

There are three main differences between ADP’s figures and the BLS Employment Situation Report.

The ADP figure is the product of changes to the payrolls of its 411,000 US clients. The BLS report is nationwide and attempts to include all public and private employees.

The ADP tracks only the net change in the number of people employed by its clients.  It does not follow other data.

The BLS survey is a labor market overview that catalogs many types of information including several unemployment rate,s average hourly earnings, length of the work week, labor force participation and others.  The data is organized into various categories, private and government employment, type of work, jobless rates and permutations. Its information is sorted along age, race and gender lines into 25 different tables of employment statistics.

One final difference is that ADP is entirely factual, the BLS non-farm payrolls are not.

The ADP number is the net change in the number of employees whose wages are paid each month. There are no estimates. Either someone is an employee and counted, or fired and subtracted from payrolls.  

The BLS monthly non-farm payroll figure includes an estimate of the number of new jobs created by small businesses that are unrecorded in official government sources.

This forecast is generated by the strikingly named birth-death model that estimates the number of business that are formed and that have failed each month.  The model uses historical data to project the number of new jobs created and the number lost as businesses rise and fall, before they are reported to the government. These estimates are compared yearly to the tax rolls and revised.  Adjustments can be substantial, 500,000 or more a year are not uncommon.

Labor Trends: ADP and NFP

Job creation has weakened this year but from a high base.

The three-month average for ADP has fallen from 253,000 in February to 125,000 in October. The 12-month average has dropped from 220,000 to 168,000.

ADP Private Payrolls

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Non-farm payrolls are down from 245,000 for the 12-month average in January to 171,000 in October, and the three-month is off from 236,000 to 159,000 in October.

Non-FarmPayrolls

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Both figures have seen occasional volatility.  Non-farm payrolls fell below to 33,000 in January though that is likely due to reporting issues around the government closure that month and 72,000 in May. The ADP number sank to 41,000 in May and 93,000 in September. In May in particular the coinciding weakness sparked speculation that the labor market was following GDP lower. Such did not turn out to be the case.

The correlation between the two statistics remains high, notwithstanding odd single month divergences.  

Labor market economic factors

The US China trade war has been the largest factor in taking down business sentiment from last year’s decade long optimism to its current recessionary levels in manufacturing and depressed service sector confidence.

Manufacturing PMI has plunged from 60.8 in August 2018 to 49.1 a year later and it has remained below the 50 expansion contraction division for these indexes since. November’s score of 48.1 was a disappointment as markets had forecast a continued upturn after the bounce to 48.3 in October following September’s 47.8 post-recession low.  The employment, new orders and new export orders indexes which had turned higher in October also fell back in November.

Manufacturing PMI

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Sentiment in the much larger service sector has dipped as well but the decline has not stretched to the 50 line as of yet.

Service PMI has descended from 60.8 in August 2018 to 52.6 in September this year with the same recovery as manufacturing to 54.7 in October.  A slight drop to 54.5 is forecast when the November figures are reported on Wednesday December 5^th at 15:00 GMT, 10:00 AM EST.

Conclusion

The decline in business optimism and investment has crimped but not derailed the labor market. Job creation has slowed about 25% from the start of the year. But the current rate of new employment remains above the 125,000-150,000 labor force additions each month. When the available new work is combined with the backlog of unfilled position from the past two years the upward pressures on wages and the general sense of well-being among workers and consumer have continued.

Domestic employers have a healthy consumer economy to thank for their job openings.  As long as consumption fosters 2% or better economic growth the need for hiring should continue.

Coincident labor market indicators, jobless claims, wages and unemployment rates give no sign of incipient problems for employers. The 4-week moving average for initial jobless claims has risen about 7,000 since late September but even at 219,750 in the third week of November it is near the bottom of its 50 year range.

The Federal Reserve’s neutral rate stance adopted in October after reducing the base rate 0.75% since July will come under scrutiny next week at the December 10-11^th meeting. The odds in the fed funds futures for continuation of the current 1.50%-1.75% target are 96.3% this month, 84.0% in January, 69.7% in March and 58.2% in April.  Traders will have chance to judge the Fed governors own opinions on the 11^th when the Fed releases its final economic and rate projections for 2019.

The dollar has come under pressure in the last several sessions as hints have surfaced that the anticipated US China trade deal may be unravelling. An agreement has long been priced into the currency equity and credit markets.

If President Trump’s comment on Monday that it might be better to wait until after the 2020 elections to strike a trade deal with China is more than a negotiating tactic then not only will markets have to reprice risk in a month of declining liquidity but the confidence expressed in the service sector that has supported hiring may start to dissolve.  

A weaker than expected ADP will suggest employers concerns are already extant, that a poor NFP is waiting on Friday and it will exacerbate pressure on the US currency.  Even a status quo or stronger than projected ADP will avail the dollar little until the China issue is settled.