The private sector lost 33,000 jobs in June, badly missing expectations for a 100,000 increase: ADP

Key Concepts:

• ADP Nonfarm Payroll Report: A monthly estimate of private sector employment.
• BLS (Bureau of Labor Statistics): The government agency that produces official employment statistics.
• Stagflation: A combination of slow economic growth and high inflation.
• JOLTS (Job Openings and Labor Turnover Survey): A survey that provides data on job openings, hires, and separations.
• Tariffs: Taxes on imported goods.
• Reshoring: Bringing manufacturing and jobs back to the home country.
• Federal Reserve (The Fed): The central bank of the United States.
• Inflation: A general increase in prices and fall in the purchasing value of money.

ADP Employment Report Analysis

• Headline Number: The ADP report showed a decline of 33,000 nonfarm payrolls, significantly below the estimate of 100,000. This is the first decline since March 2023 and the second consecutive month of weaker-than-expected numbers after a downward revision of 29,000 for May.
• Sector Breakdown:
  • Goods-producing sector: Increased by 32,000 jobs.
  • Services sector: Decreased by 66,000 jobs.
  • Small businesses (1-49 employees): Down 47,000.
  • Medium-sized businesses (50-499 employees): Down 15,000.
  • Large businesses (500+ employees): Up 30,000.
  • Professional and business services: Down 56,000.
  • Education and health services: Down 52,000.
  • Financial activities: Down 14,000.
  • Manufacturing: Up 15,000.
  • Leisure and hospitality: Up 32,000.
• Wage Growth:
  • Job stayers: Wage growth of 4.4%, a slight decrease.
  • Job changers: Wage growth of 6.8%, down 0.2% from the previous month.
• ADP vs. BLS Discrepancy: The average absolute difference between ADP and BLS private sector numbers is 77,000 per month, indicating a significant divergence. Over a 12-month period, the difference is about 200,000 (approximately 14,000 per month).
• Other Data Points: Mentions of job firings outnumbered mentions of hirings by 3 to 1 in the ISM manufacturing report.

Market and Fed Implications

• Fed Pressure: The weak ADP report increases pressure on the Federal Reserve to cut interest rates. However, it does not alleviate concerns about potential inflation, potentially deepening stagflationary concerns.
• Market Reaction: The market has an "ambivalent relationship" with the ADP report due to its inconsistency. However, it can still be useful for spotting trends or underlining concerns about economic softness.

Rick Santelli's Perspective

• Labor Market Slowdown: Santelli acknowledges that the labor market is expected to slow down, but he believes the "glide path" will be long.
• ADP vs. Labor Department Statistics: He notes the widespread discrepancy between ADP and Labor Department statistics.
• Tariffs and Uncertainty: Santelli suggests that uncertainty related to tariffs and the current administration's policies may be contributing to the slowdown. He points out that increased use of the word "firing" over "hiring" may be a contrarian indicator.
• Small Business Impact: Small businesses that import goods or use imported materials may be particularly affected by tariffs.
• Fed Policy: Santelli recalls that the Fed previously cut rates by 50 basis points due to weakness in the job market, but in a different inflation environment. He questions why tariffs are being treated differently than other sources of uncertainty that the Fed has addressed in the past.
• Tariff Impact Overstated: Santelli argues that the impact of tariffs is being overstated, and that the situation is not as rigid as some suggest. He questions the assertion of a 10% across-the-board increase in tariffs on imports.

Uncertainty and Lack of Hiring

• Standing in place (not hiring) creates a drain on job growth because people leave the job market. The issue is not necessarily increased firings, but a lack of hiring to replace those who leave.
• Stability in trade policy is needed to allow businesses to "rightsize" their employment levels.

Conclusion

The ADP report indicates a potential softening in the labor market, particularly in the services sector and among small businesses. While the report is not always accurate, it can signal underlying trends. The data increases pressure on the Federal Reserve to consider interest rate cuts, but concerns about inflation remain. Uncertainty related to tariffs and trade policy may be contributing to the slowdown, but some argue that the impact of tariffs is being overstated. The key issue is a lack of hiring to replace those leaving the workforce, creating a drain on job growth.