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ADP Employment Report Shows An Improving Labor Market

Posted: Thursday, September 3rd, 2020

Estimated Reading Time: 2 minutes

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Yesterday’s ADP Employment Report, or the private payrolls report, disappointed markets. On expectations of 1.25 million new jobs, the report showed only 428,000 jobs created.

Yet, the market did not sell-off. Just the opposite – the Dow Jones closed above 29,000 for the first time during the pandemic. Moreover, the USD rallied across the board, gaining against its rivals after the ADP Employment Report was released.

As it turns out, it depends a lot on how one looks at the report. On the one hand, yes, it disappointed when compared to expectations. But were they realistic?

On the other hand, this is the fourth consecutive month when the private sector ads jobs – a positive outcome, nevertheless, despite not matching the market’s expectations.

ADP Employment Report

The ADP Employment Report and Why It Matters for the Markets

Traders and investors are well-aware of the reliability of the ADP Employment Report in forecasting the NFP number. Or, this is precisely why the market tends to ignore the ADP data – it does not correlate with the NFP to be released two days after.

During the NFP week, investors search for clues about the state of the labor market. At least one ISM report comes out this week – the manufacturing one. And, most of the time, the non-manufacturing too.

Both of them offer a deep understanding of what is going on within the sectors. Therefore, the employment component plays a central role in building expectations about the upcoming NFP data.

This week so far, only the ISM Manufacturing report came out. The employment component is the only one that still contracts, remaining below the 50 level. As a side note, the 50 level marks the difference between a sector that expands and one that contracts.

However, employment in the manufacturing sector is on the rise. While not above the 50, it shows improvements from month to month.

A closer look at the ADP Employment Report released yesterday reveals that the services sector added nine times more than the jobs added by the manufacturing sector. Hence, if we are to interpret the employment component as reported by the ISM, we better use the non-manufacturing release.

The fear at this point in the recovery (if there is a recovery) is that many furloughed people are not being re-employed. Concerns emerge and the upcoming NFP and unemployment figures are key to understanding the true stance of the recovery and the pace of it.

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