Private Sector Employment Beats Expectations Points to Friday’s Jobs Report

By Rom Badilla, CFA

October 3, 2012

In a prelude to the official Jobs Report on Friday, Automatic Data Processing reported that businesses added people to their payrolls last month suggesting continued growth for the U.S. economy. The Automatic Data Processing National Employment Report showed that businesses added 162,000 new workers to their payroll last month. This was a stronger than expected report since market expectations were calling for a decline to 140,000 according to consensus forecasts. Despite the surprise, previous month’s figures were revised downward. August figures were revised downward by 12,000 people to 189,000 while July was lowered from by an additional 17,000 workers. Because of these revisions, the ADP Data has failed to surpass 200,000 since March 2012.

Robust employment gains suggest better growth prospects for the economy. As economic growth begins to accelerate, resources such as materials, factories, and people are being utilized. As more and more resources become used to a point where they become scarce, the price to use them begins to accelerate. Commodity prices ranging from food to metals start to rise while people’s income and wages start to increase as finding qualified workers becomes difficult. When these costs move high enough where they are passed along by producers to final goods and services – items we use on a day to day basis, individuals may no longer afford them which can be a problem.

So when these price pressures amount to rising inflation, bond yields increase. This occurs because bond buyers want higher yields in order to be compensated for the rising prices of items they can buy in the future. As holders of fixed income securities, the value of their bond investments falls as prevailing market yields are higher.

Conversely, when inflation is flat or declining (via disinflation or deflation), yields decrease which in turn lead to an appreciation in bond prices.

Behind the headlines, small businesses accounted for much of the increase in payrolls. In total, small firms with less than 49 employees, increased 81,000 people from last month to 50,059. Medium sized firms added 64,000 workers while large firms with 500 or more employees added just 17,000 people.

Among the types of industries, service-producing firms added 144,000 people while goods-producing companies added 18,000 workers.

It is important to point out that while ADP Data provides an indication of the health of the labor markets, it has generally missed changes in the official national number, Non-Farm Payrolls number released by the U.S. Department of Labor. In the past three months, the ADP employment changes have surpassed the changes in Non-Farm Payrolls by about 60,000 on average. For the past year, ADP has overstated employment growth by close to 30,000 workers.

Having said this, today’s data release by ADP points to more of the same in terms of growth in Non-Farm Payrolls set for release this Friday. As of now, the median forecast by economists for Non-Farm Payrolls growth in September stands at +115,000 workers which follows an addition of 96,000 employees in August.

Visit Bondsquawk on Facebook!

Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.