Investors’ attention turns to the US job market now that inflation is well above the Fed’s target. Yesterday’s ADP report shows that the US economy added more jobs in the private sector than the market expected.
The ADP report is released two days ahead of Non-Farm Payrolls (NFP) and it shows the number of jobs created by the US private sector. From May to June, the private sector added 690k new jobs, higher than the market consensus of 555k.
While this is a solid result, it is not exceptional. Much of the positive surprise was offset by the May data, which was revised lower by 92k, compensating for the monthly increase.
Businesses in all categories (i.e. small, medium, large) added over 200k jobs each. As such, small businesses added 215k new jobs, medium businesses added 236k more jobs, and large businesses added another 240k.
Over 85% of the newly created jobs were in the services sector. The leisure & hospitality sector accounted for much of the job creation, with over 330k new jobs.
ADP vs NFP – Are the Two Reports Correlated?
Many traders view the ADP report as more relevant for the US labour market than the NFP. The reason is that the US economy has a strong private sector, with the highest entrepreneurial spirit in the world. For example, during the pandemic in 2020, 4.4 million new businesses were started in the United States – a modern record.
Nevertheless the currency market does not react much to the ADP report, not even when the number misses expectations consistently. The important data comes from the NFP report, viewed as more comprehensive and only two days away. Moreover, supplementary data, such as the unemployment rate or the labour force participation rate, is released at the same time with the NFP data.
The chart above shows the inconsistent relationship between the ADP and the NFP report. While in 2020 the NFP report showed more jobs than the ADP, the trend changed in the last months, with the NFP lagging behind the ADP number.