The Great Jobs Data Fake-Out

A little-known report from ADP befuddled Wall Street forecastersand investors. Where do things really stand?

Economists and traders pride themselves on being clear-eyed—maybe even cynical—about the multitude of numbers that cross their desks. Nevertheless, many were faked out of their wingtips this week by a bullish job-growth forecast from the payroll processing firm Automatic Data Processing (ADP). ADP's new National Employment Report hit the newswires before the opening of trading on July 5, just as Wall Street was yawning back into action after a four-day weekend of burgers and parades.

Traders stopped yawning when they read ADP's projections. The firm asserted confidently: "Total nonfarm private employment grew 368,000 from May to June on a seasonally adjusted basis, according to the ADP National Employment Report. These findings indicate a strong acceleration of employment in June." Naturally, the report roiled the financial markets, causing traders to bet that the Federal Reserve would raise interest rates again to keep the economy from overheating.

Oops. Turns out the ADP report vastly overestimated the labor market's strength. In fact, the Bureau of Labor Statistics reported on July 7 that total nonfarm private employment rose by just 90,000 in June, out of a total nonfarm increase—including government jobs—of 121,000.


  Among those stung by the vast discrepancy was David Resler, chief economist of Nomura Securities International. Up until July 6, Resler had been projecting growth of 150,000 in nonfarm payrolls, which in retrospect would have been just about right. But the ADP report helped persuade him to raise his forecast on July 6 to 300,000 new jobs—among the most optimistic estimates of any Wall Street forecaster.

What does Resler say now? Obviously, he says, the ADP number was too high. But he thinks the official number of 121,000 jobs created may understate the economy's growth in June. "Taken in its entirety, the data that we've seen on a wide range of sources shows a rather healthy job market," Resler said in an interview.

Chris Rupkey, an economist for Bank of Tokyo-Mitsubishi UFJ, was also taken aback by ADP's big miss. The ADP Web site carries a research report he wrote on June 1 saying he expected the new index to provide a "good read [of] the labor market." Now Rupkey says, "It got a little bit oversold. It didn't work out well."

Rupkey says burned traders are telling him they'll never look at the ADP report again. But he suspects they will because, taken with a grain of salt, it can be a valuable indicator.


  Wrong guesses aside, what is the economy doing? While it's continuing to cool from its hot first-quarter pace, it's far from tumbling into recession, with GDP growth expected to moderate to a 2%-plus pace in the second and third quarters. The unemployment rate remains at a low 4.6%. The June jobs report and other indicators point to a transition from consumer-led growth to an economy led by business investment.

As for inflation, it appears well-contained. The hawkish Federal Reserve may raise rates again in August, but it's not clear that more hikes are necessary to keep inflation in line.

All in all, things appear to be on a steady track. Now if those economic forecasters could just improve their aim. …

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