Wednesday, August 1, 2012

The Fed is in the spotlight once again today, with the post-FOMC meeting statement coming out this afternoon. But those looking for fresh concrete actions from the central bank will likely get disappointed as the odds of a new round of quantitative easing are quite low. The statement will likely reiterate the central bank’s commitment to ‘do more’ should conditions warrant. They will also likely acknowledge the downside risks to the economic outlook, but will stay shy of making a new announcement.

Many see the economic picture not bad enough to warrant another round of bond-purchase program, particularly given the questionable utility of such a measure to the economy anyway. And the positive looking jobs data from payroll processor Automatic Data Processing (ADP - Snapshot Report)) this morning certainly bears out that line of thinking. Also on deck for release a little later is the July manufacturing ISM report, but the focus of course will be on the Fed statement coming out this afternoon.

The ADP report is showing better than expected private-sector jobs of 163K in July and the tally June was modestly revised downwards to 172K from 176K. The biggest increase came from smaller firms (firms with less than 50 employees), adding 73K jobs, while medium and large businesses added 67K and 23K jobs in July, respectively. Service sector jobs increased by 148K in July vs. 151K in June, while manufacturing employment increase by 9K in July after the 6K gain in June.

The expectation for Friday’s BLS report ahead of this morning’s ADP report was for headline gains of around 100K. If the ADP report is painting a correct picture of private sector jobs in July, then we will get a positive surprise on Friday from the BLS. But given the ADP’s less than stellar record of late in foretelling the government jobs number, hardly anyone will be making that bet with this morning’s numbers.

But irrespective of how accurate or otherwise the ADP report is in gauging the health of the labor market in real time, the important takeaway may actually be that the labor market is weak but it may not be weakening any further. And it is this takeaway which is critical to what the Fed will or will not do on the QE question.

Sheraz Mian
Director of Research