Critical ADP Jobs Report [December Results]

ADP Jobs Report Analysis - December 2023/January 2024

Key Concepts:

• ADP Jobs Report: A monthly report indicating the net change in non-farm, private-sector employment in the United States. It’s considered a leading indicator of the broader employment situation.
• Yield Curve: A line plotting the interest rates (yields) of bonds having equal credit quality but differing maturity dates. Its shape can indicate market expectations about future economic activity. Specifically, the spread between the 10-year and 2-year Treasury yields is discussed.
• Soft Landing: A scenario where inflation is brought under control without causing a significant economic recession.
• JOLTS (Job Openings and Labor Turnover Survey): A monthly survey by the Bureau of Labor Statistics (BLS) providing data on job openings, hires, and separations.
• Bureau of Labor Statistics (BLS) Jobs Report: The official monthly employment report released by the BLS, considered the most comprehensive measure of the US labor market.
• Seasonally Adjusted Data: Data that has been adjusted to remove the effects of predictable seasonal fluctuations, allowing for a clearer view of underlying trends.
• SAM Rule: Not explicitly defined, but referenced as a trigger for significant market reaction based on revisions to economic data.
• Labor Force Participation Rate: The percentage of the civilian noninstitutional population that is working or actively looking for work.

I. Initial ADP Report & Market Reaction

The ADP jobs report for December showed an increase of 41,000 jobs, falling short of the forecasted 50,000 (revised up from 48,000). The previous report was revised to -32,000. Despite being a “miss” relative to expectations, the speaker views 41,000 as a reasonably positive number, not “too hot” to preclude future rate cuts, but low enough to potentially increase the odds of one. Initial pre-market reaction was minimal, with markets awaiting further catalysts.

II. Upcoming Economic Catalysts & Schedule

Several key economic reports are scheduled for release in the coming days, which will significantly influence market direction:

• ISM Services: Released today (date of recording) at 7:00 AM.
• JOLTS Survey: Released today at 7:00 AM.
• Challenger Job Cuts: Released tomorrow at 4:30 AM.
• Bureau of Labor Statistics (BLS) Jobs Report: Released Friday morning, with current estimates at 66,000.

The speaker emphasizes the importance of these reports, particularly JOLTS and the BLS report, in shaping the week’s economic narrative.

III. ADP Report Details: Sectoral Breakdown & Wage Growth

The ADP report revealed a rebound in hiring, described as “quite bullish” for a potential soft landing. The gains were primarily driven by:

• Education and Health Services: Significant job growth.
• Leisure and Hospitality: Strong gains, potentially indicating consumer confidence.
• Small Establishments: Recovered from job losses with positive year-end hiring, though large employers also pulled back.
• Mid-sized businesses: Added the most jobs overall.

Conversely, the report highlighted weakness in:

• Manufacturing: Continuing a 20-month slowdown.
• Professional and Business Services: Experienced job losses.
• Information: Experienced job losses.

Regarding wage growth, the report showed:

• Year-over-year pay for those staying in their jobs: Remained unchanged at 4.4%.
• Pay increase for job changers: Accelerated from 6.3% to 6.6%, suggesting continued demand for workers and competitive pressures.
• Pay increases varied by firm size: Small firms saw the lowest increases (2.3%), while large firms offered the largest bumps (4.8%).

IV. Yield Curve Analysis & Recessionary Concerns

The release of the ADP report caused a drop in Treasury yields:

• 10-year Treasury yield: Decreased by 4.7 basis points.
• 2-year Treasury yield: Decreased by 1.8 basis points.

This led to a convergence of the 10-year and 2-year yield curve, moving it down to 68 basis points. The speaker notes that while this is positive, a spread exceeding 125 basis points historically signals a recession, and anything over 50 is considered “shockprone.” The ADP report slightly softened the risk of further yield curve inversion.

V. Comparison to BLS Report & Data Reliability

The speaker acknowledges that the ADP report isn’t always a strong predictor of the BLS jobs report, but it serves as a “gut check.” He also expresses some skepticism about the accuracy of government data, suggesting potential for manipulation. The BLS report is expected to show 66,000 jobs added. A figure exceeding 100,000 could reduce expectations for rate cuts.

VI. S&P Report & Consumer Spending

Referencing a separate S&P report, the speaker notes that consumer goods purchases were strong in December, indicating some level of consumer confidence. However, the S&P services report showed weakening business activity and a slight decline in employment, with new business inflows at their weakest point in 18 months – a potential precursor to layoffs.

VII. Seasonal Adjustments & Overall Assessment

The speaker emphasizes the importance of considering seasonal adjustments when interpreting the leisure and hospitality data, particularly during the holiday season. He concludes that the ADP report is generally positive, showing a rebound in hiring without triggering major revisions or a surge in the labor force participation rate (which could paradoxically increase unemployment).

VIII. Future Outlook & Upcoming Events

The speaker expresses optimism if the positive trend continues through the week’s economic data releases. He anticipates the next major event will be the Federal Reserve meeting (Fed Day), where a rate cut is currently seen as unlikely (16.1% probability).

Notable Quotes:

• “41,000, that's actually not that bad.” – Regarding the ADP jobs number.
• “This is the definition of how to get to a soft landing is you rebound that soft patch of jobs, and after you get that rebound, we actually get back to cooking.” – Describing the ideal scenario for a soft landing.
• “Hiring has been tepid recently and unemployment has risen, which is weighing down not only economist forecasts heading into the new year, but also Americans own views of the employment of their employment prospects.” – Quoting a source regarding the broader economic sentiment.
• “Bullish catalyst.” – The speaker’s preferred term for positive economic data.

Conclusion:

The December ADP jobs report presented a mixed but generally positive picture of the US labor market. While falling short of expectations, the rebound in hiring, particularly in key sectors like education, health, and leisure, offers hope for a soft landing. The speaker emphasizes the importance of upcoming economic data releases, especially the JOLTS survey and the BLS jobs report, in confirming this trend and shaping market expectations regarding future Federal Reserve policy. The yield curve’s slight convergence is also a positive sign, though recessionary risks remain if the spread continues to widen.