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Is Taper Back on the Table After ADP?

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Wednesday, July 3, 2013

The stock market has plenty to chew on in today’s truncated trading session - from material economic data on the home front to destabilizing noise from Portugal and Egypt. But what really matters today is the broadly positive tone of jobs data from Automatic Data Processing (
(ADP - Free Report) ) and also from weekly Jobless Claims. We have some more data on tap for release a little later, particularly the service sector ISM reading, but the ADP report provides a reassuring picture of the jobs market and the economy.

From the market’s perspective, however, a positive jobs picture may raise unnerving questions about what the Fed would do to its to its bond-purchase program. Looked at from that Fed prism, this morning’s jobs data could be viewed as market unfriendly.

The ADP report shows a total of 188K private sector jobs in June vs. consensus expectations of about 175K. The May tally was modestly revised lower to 134K from 135K. This report’s primary purpose is to serve as a preview of the non-farm payroll report from the government’s BLS coming out on Friday. The consensus expectation is for ‘headline’ BLS gains of +161K, though a straight extrapolation from today’s ADP report would mean a positive surprise on Friday. If the government sector lost about 10K jobs in June as has been the case in recent months, then a straight extrapolation from the ADP number would mean a +178K headline jobs tally Friday. But with the ADP report consistently undershooting the BLS numbers in recent months, we could be in for a bigger positive surprise on Friday.

The positivity coming out of this report is broad-based, with employers of all sizes adding to payrolls. Small businesses, employers having less than 50 employees, added +84K jobs in June vs. 58K jobs in May. Medium-sized businesses (less than 500 employees) added +55K in June vs. +39K jobs in May, while large businesses (1000+ employees) added +49K in June vs. +39K jobs in the preceding month.

Notably, the goods-producing sector added +27K jobs in June, the biggest gain in four months, with gains in the construction sector the biggest since January this year at +21K. Manufacturing added +1K jobs in June after shedding jobs in the preceding two months, broadly in-line with what we saw in the June manufacturing ISM report on Monday, which showed the factory sector getting back into positive territory after falling into contraction territory the month before. Most of the May jobs came from the services-providing sectors, with gains on that side at +161K. We will get the service sector ISM report a little later.

The big issue from the market’s perspective is what all of this means for Fed policy. My sense is that this report is consistent with a steadily improving economy that affords the Fed enough flexibility to take its foot off the QE paddle. The ADP report hasn’t been a very accurate predictor of BLS numbers in recent months. But if we are on track to get a positive number on Friday, then I would expect the ‘taper’ scenario to be back in the spotlight, notwithstanding denials and explanations from Fed officials.

Perhaps we don't need to fret about Friday’s numbers at this stage – let’s be done with today’s truncated trading session and enjoy the July 4th holiday.

Sheraz Mian
Director of Research


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