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First Cut: ADP National Employment Report well below expectations in May, but probably better than the headline would suggest

The ADP National Employment Report said private payrolls were up 27,000 in May, well below market expectations and substantially softer than the 271,000 in April. The decline reflected a decrease in goods producers (down 43,000) that offset nearly half of the 71,000 rise for service providers.

The comparatively meager increase in May follows an outsized gain in April. The average of the two months is up 149,000 which is still below the median market expectation of 175,000, but not materially so.  It also isn’t that different from the 188,000 per month average of 2019 to-date. There are indications in some of the regional surveys for manufacturing and services that the pace of hiring has moderated. I think that the May reading should be considered an outlier and not a signal that the labor market is in immediate danger of deterioration. Rather, the labor market is less tight than it was but is still quite active. The underlying pace of job adds is above where the FOMC would look for a labor market able to absorb new workers and chip away at any remaining slack.

Employment among goods producers was down 36,000 in May for construction which did not wipe out the increase of 45,000 in the prior month. Hiring for manufacturing was little changed at down 3,000 in May after up 6,000 in April. Among service providers, the pace of hiring for professional and business services was up 22,000 in May, about 1/3 of the up 66,000 in April.  May would normally reflect slower hiring for education, which it did with a scant down 1,000 after up 12,000 in April. Trade and transportation hiring was flat after up 17,000 in April. Financial activities was up 13,000 in May, possibly related to renewed activity in the housing market.

The headline for the ADP report will likely result in a number of downward revisions in estimates for the May Employment Situation set for 8:30 ET on Friday. However, the Bureau of Labor Statistics numbers and those from the ADP have historically seen some significant misses. What the ADP report tells me is that private payroll gains are likely to be lower than up 175,000 in the current median market estimates. It will also probably need to be viewed in the context of an April/May average since private payrolls were up 236,000 in the BLS data last month.

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