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Ahead of Wall Street

Wednesday, February 5, 2014

The ADP (ADP - Analyst Report) report fails to answer questions about the economy raised by other recent soft readings. The report came short of expectations, but wasn’t entirely out of line with the recent trend line.

Perhaps the service sector ISM survey coming out a little later will give us a bit more color, but the focus now will now be on Friday’s government jobs report to clear the air. This uncertain backdrop means that stocks won’t likely be able to build on Tuesday’s positive bounce.

The ADP report came in weaker than expected, with the January private-sector jobs tally at 175K tally and a downward revision to the December number. The revision to the December rally, which was materially in conflict with the government data that month, is fairly modest (227K now vs. 238K originally vs. the BLS tally of 74K). That said, the January ADP jobs tally is the third sequentially lower number in a row (289K in November vs. 227K in December vs. 175K in January), likely indicating some loss of momentum in the labor market.

The gains were broad-based, with small businesses (employers having less than 50 employees) adding 75K jobs in January. Medium-sized businesses (less than 500 employees) added +66K jobs, while large businesses (1000+ employees) added +34K jobs during the month.

The goods-producing sectors added +16K jobs in January, with 25K Construction gains offset by 12K lost in manufacturing. The construction numbers don’t appear to show any weather impact, or maybe the ADP report doesn’t do a good job of capturing weather effects.

The ADP miss notwithstanding, the report isn’t that out of the range with the recent trend-line and isn’t indicative a material downshift in the economy’s growth momentum, along the lines of Monday’s manufacturing ISM and December’s government jobs report. If today’s ADP report is more reflective of ground realities in the labor market, then we should expect positive revisions to the December jobs tally in Friday’s report.

Sheraz Mian

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