The ADP employment report for May showed a gain of 38,000. This was the smallest increase since last September and considerably weaker than anticipated (consensus +175,000). Manufacturing employment fell by 9,000. Service-sector employment rose by only 48,000. Recent data has revealed that momentum in the US economy decelerated notably, starting in April. Businesses appear to have reacted quickly with a retrenchment in hiring activity.
ADP, a company that processes payrolls for other businesses, samples its own database to create an estimate of monthly changes in private payrolls for the nation as a whole. Over the previous six months, ADP had reported average monthly gains of +25,000 jobs for the manufacturing sector. The 9,000 decline in May suggests that manufacturers are concerned about the strength of demand and therefore took a break from new hiring. One complicating factor is the extent to which parts shortages in the auto sector – related to the Japanese earthquake in March – have impacted production and therefore employment.
The 48,000 increase in service-sector jobs in May compares with an average gain of 162,000 over the previous six months. Over 80% of private-sector jobs are in service industries, so this softening is an important development. The April ISM non-manufacturing report, released on 4 May, was one of the first data releases to show clear evidence of softening, including an 11pt drop in the new orders series. This slowing in demand appears to have an impact on employment.
In terms of our expectations for Friday’s nonfarm payroll report, we are not making any adjustment to our forecast of +210,000 jobs. We do believe the ADP report contains some valuable information about the state of the labor market. However, the month-to-month relationship between the ADP and official payroll series has not been strong enough in real time to warrant a big adjustment to our estimate. As a side note, the current methodology for ADP incorporates weekly jobless claims into the calculation. We already knew that claims rose from 416,000 in early April up to 438,000 in early May. This may explain a portion – but not all – of today’s weaker result.
Bottom Line: Today’s ADP report showed a deceleration in hiring activity, suggesting businesses are concerned about the momentum of demand and overall economic growth.
Ryan Wang
HSBC Global Research