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Why should investors follow the ADP jobs report?

Why should investors follow the ADP jobs report? (Part 1 of 8)

Must-know: Why should investors follow job indicators?

Personal spending and employment

Personal spending accounts for almost 70% of U.S. GDP. Employment, through wages, is what enables this spending, making it a key driver of economic growth. So investors as well as economists closely watch the employment indicator statistics released by various government and private agencies, particularly the ADP National Employment Report and the Bureau of Labor Statistics Employment Situation, as they provide some insight into the dynamics of the labor market.

Civilian Unemployment RateEnlarge Graph

Employment indicators provide insights on wage trends. Wage inflation has always been high on the list of enemies for the Federal Reserve. Fed officials constantly monitor this data, watching for even the smallest signs of potential inflationary pressures—even when economic conditions are lackluster. If inflation is under control, it’s easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

The ADP national employment report doesn’t yet reflect wage information, but ADP’s goal is to provide wage information along with industry and regional feedback as well.

The job market is the heartbeat of the economy. It’s both an indicator of economic health—since a strong economy prompts companies to hire more workers—and an engine of growth, since higher employment means more dollars available to spend on goods and services. Without job growth, overall economic growth is likely to be limited no matter what else is happening in other areas of the economy.

The performances of popular exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF)—which track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM)—serve as a good indicator of the course the U.S. economy is taking.

The next part of this series explains what exactly you can glean from jobs reports.

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