ADP jobs report: Why large firms added the least number of jobs

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European Central Bank's rate shift increases Treasuries (Part 4 of 5)

(Continued from Part 3)

Automatic Data Processing Report

The National Employment Report (or NER) issued by Automatic Data Processing (or ADP) in collaboration with Moody’s Analytics, is one of the most watched monthly labor indicators. The ADP report covers increase in payrolls in the private sector and releases a couple of days ahead of the Bureau of Labor Statistics (or BLS) jobs report, giving markets a  heads up on the BLS figures. In contrast to the ADP report, the BLS report covers both private and government payroll additions.

The ADP-NER for the month of May, released on Wednesday, June 4. The U.S. private sector added about 179,000 jobs in the month of May, according to the release. This was below consensus market estimates of ~210,000. The number of private sector jobs created in May were sharply down from April’s revised figure of 215,000, which suggested that the rate of jobs increase in the labor market had slowed after the post-winter spike.

Key takeaways from the ADP report

Goods producing jobs recorded an increase of 29,000 in May—compared to 21,000 added in April. Manufacturing jobs increased the most among goods producing sector components, rising by 10,000, which was the highest figure since December, 2013.

The number of service sector jobs added in May declined to 150,000 from 194,000 in April. The largest increase in jobs were recorded in the professional and business services sector (46,000), followed by trade, transportation, and utilities (35,000).

Payroll additions were the highest for small businesses (between 1–49 employees) at 82,000. Large businesses (over 500 employees) added the least number of jobs at 37,000. Firms which employed between 500–1,000 staff, actually reduced payrolls by 3,000.

Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth moderated in May. The slowing in growth was concentrated in Professional and Business Services and companies with 50–999 employees. The job market has yet to break out from the pace of growth that has prevailed over the last three years.”

Investor impact

Although job creation in the private sector was lower than what was expected in the month of May, this is largely due to the outsized gains recorded in March and April. Markets are still bullish on the prospects for the economy as the S&P 500 Index has touched a series of record highs in the past few days, buoyed by positive economic data, notably in durable goods orders and the manufacturing sector. ETFs providing exposure to the industrials and manufacturing sector include the Vanguard Industrials ETF (VIS) and the State Street Industrial Select Sector SPDR (XLI).

Bond prices have also surged higher, due to higher investor demand for Treasury securities. Yields on 30-year Treasury bonds (TLT) declined by eight basis points in the month of May to 3.33% on May 30. Yields on 7–10 year Treasury bonds (IEF) declined the most—yields decreased by 15 basis points in the month of May to 2.06% and 2.48% on May 30, respectively.

What is the ADP-NER?

The ADP-NER is issued by leading payroll processor, Automatic Data Processing, in collaboration with Moody’s Analytics Inc. (MCO). The latter is a subsidiary of Moody’s Corporation. The report provides a monthly assessment of non-farm payroll additions in the private sector. The ADP-NER is based on actual transactional, payroll data collected from about 406,000 private sector companies, using a population of approximately 24 million employees (or over 20% of total private sector employees). One of the world’s largest providers of business outsourcing and human capital management solutions, ADP collects this data anonymously from its client companies.

In the next section, we’ll look at another labor market indicator, the Gallup U.S. Jobs Creation Index, which also released on Wednesday. Please continue reading the next section of this series.

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