The major indexes have started today’s trading on a positive note, despite the soft(ish) labor market reading from payroll processor ADP (ADP). While some may attribute today’s bounce to Fed-centric hopes following the labor market report, I see it as nothing more than follow through to the favorable overnight market action out of Asia and Europe that came after Tuesday’s outsized losses. I wouldn’t put too much ‘stock’ in today’s bounce… the issues that gave us the recent sell-off are still very much with us.
The ADP jobs report, which serves as a preview for the all-important monthly non-farm payroll report from the U.S. government’s Bureau of Labor Statistics, came short of expectations. The report shows gains of 190K in August relative to estimates of 210K and the prior month’s (unrevised) 185K gain.
One would expect this ‘miss’ to put downward pressure on estimates for the Friday BLS report, which currently stand at 223K, per Bloomberg.com. But the ADP report hasn’t had that stellar a track record lately – it failed to give us a good preview of the BLS report last month and a number of other times recently as well.
While the report is on the soft side, it is nevertheless within the monthly range over the past 12 to 18 months. Gains in the report were concentrated in the service sector of the economy, with the bulk of the jobs coming from small and medium-sized employers. In the aggregate, the services sector added 173K in August while goods-producing industries added only 17K.
[Read: Oversold Extremes and the Case for an October Low]
The construction industry had another strong month, adding 17K positions during the month, while manufacturing added a not-too-shabby 7K jobs. The construction strength is in-line with what we have been seeing in other housing related readings like housing starts and new home sales numbers.
The service-sector ISM survey coming out Thursday will likely reconfirm the continued momentum on the service side of the economy, though the manufacturing sector results are a tad bit better than what we saw in the factory sector survey on Tuesday. In terms of business size, large businesses (500 or more employees) added 40K jobs, medium-sized businesses added 66K, while small businesses with less than 50 employees in total added 85K jobs.
The key report from the Fed’s perspective is Friday’s BLS non-farm payroll reading, though many in the market suspect that the recent China-inspired market volatility has lowered the odds of the central going for lift-off this month. It will be unfortunate in my judgment if that turns out to be the case — the U.S. economy is strong enough at present to withstand the start of a monetary policy normalization process.
As I have shared with folks before in this space, the Fed started the zero interest rate policy when the U.S. economy was literally in freefall. We are not even remotely in that sort of situation today. Hesitation on the part of the Fed to start the lift-off this month will be sending a bad signal about the state of the economy, in my view.
