US ADP Employment matches estimates - ING

James Smith, Economist at ING, suggests that although ADP's estimate of employment remained below 200k in May, we would caution against relying on it too heavily as a guide for tomorrow's labour report.

Key Quotes

“In advance of this week’s hotly-anticipated labour report, ADP’s estimate of May’s private payrolls came in (rather magically) exactly on consensus at 173k. This figure may not have been adjusted for the Verizon strike, which the BLS has already said will remove approximately 35k workers from May’s overall employment and this in principal, supports the view that non-farm payrolls (NFP) will come in below 200k again tomorrow.

However, we would note that, whilst ADP use information from their client’s payrolls, this is only one (possibly relatively small) part of the overall forecasting model that they employ. It is also a function of last month’s official payrolls data (ie an autoregressive model) and a business conditions index (which is composed of activity data such as industrial production and GDP). As a result, we would caution against relying too heavily on this estimate of NFP, as the information specifically contained about May’s labour market performance may be fairly limited.

Despite the strike-related distortion, we feel that Friday’s consensus figure is a little low. Although it is possible that job creation is slowing as the economy reaches something close to full employment, the high month-on-month volatility (arising from several factors, not least statistical/seasonal adjustment gyrations) in NFP means that the risk of a higher reading than last month (160k) is arguably greater than the risk of a lower one. We look for something at or above what we consider to be the current underlying trend (roughly 180k-185k).

That said, we feel that the key to the next FOMC rate hike does not lie within the labour report. As recent speeches/statements have shown, the Fed’s labour market check-box is effectively already “ticked” and thus the timing of the next move depends more on how FOMC members perceive the recovery in activity data to have been since a weak first quarter. In that regard, the final (and probably definitive) green or red light to a June hike will come from Chair Yellen’s speech on Monday. On balance, although many of the FOMC’s conditions for a hike have arguably been largely met, we feel that they are more likely to wait until the third quarter (most likely July), when the UK referendum event risk has passed.”