Without payrolls report, ADP employment report takes center stage

Market Realist

The ADP National Employment Report is a monthly preview of the Labor Department’s Jobs Report

Automatic Data Processing (ADP) is a global provider of business outsourcing. It provides a range of services, from human resources to payroll. The ADP National Employment Report is published monthly by the ADP Research Institute. It provides a snapshot of the current non-farm private sector payroll data based on actual transactional payroll data. ADP collaborates with Moody’s (MCO) to attempt to predict the Bureau of Labor Statistics’ payroll numbers.

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Interestingly, the ADP employment report provides a very tight correlation with the BLS’s revised payroll numbers. The BLS revises its payroll data twice, and the ADP number comes out before the first estimate. The BLS’s first estimate is based on roughly 70% of the establishments sampled. The second revision includes another 20% and the final revision adds another 4%. Since ADP’s numbers are based on live payroll data, they’re more accurate than the BLS’s first pass at the numbers.

The ADP payroll data will correspond with the BLS’s private non-farm job numbers. The nonfarm payroll number will include public sector jobs, which must be subtracted out to make an apples-to-apples comparison with the ADP report.

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Highlights of the report

Due to the government shutdown, we’ll probably not get the Bureau of Labor Statistic’s Employment Situation report, which means the ADP report takes on more significance.

Private sector employment increased by 166,000 in the month of September, while August’s numbers were revised downward from 176,000 to 159,000. In terms of industries, trade and transportation increased the most, by 54,000, while financial employment dropped by 4,000. The drop in financial employment is undoubtedly due to banks shedding mortgage-related employees as the refinance boom ends.

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Services increased by 147,000, while goods-producing companies increased 19,000. Small business accounted for 74,000 of the increase, while medium and large businesses contributed 92,000. Overall, the report shows that the job market continues to expand but the rate of expansion has moderated since the beginning of the year.

Implications for mortgage REITs

Mortgage REITs like American Capital (AGNC), Annaly (NLY), MFA Financial (MFA), Hatteras (HTS), and Capstead (CMO) have been at the mercy of the bond market sell-off that started on May 1. The REITs have gotten a bit of a reprieve as the Fed decided to hold off tapering at the September meeting.

Rising interest rates lower the value of fixed income assets, especially mortgage-backed securities. When rates rise, REITs take capital losses on their portfolios and because they use leverage (in other words, they fund their portfolios through borrowed money), any changes in asset prices have an outsized effect on their equity.

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