ADP Payrolls come in lower than expected

ADP Payrolls come in lower than expected


Nov. 20 2020, Updated 3:57 p.m. ET

The ADP National Employment Report is a monthly preview of the Labor Department’s Jobs Report

Automatic Data Processing (ADP) is a global provider of business outsourcing. They provide a range of services from human resources to payroll. The ADP National Employment Report is published monthly by the ADP Research Institute. It provides a snapshot of the current nonfarm private sector payroll data based on actual transactional payroll data. ADP collaborates with Moody’s (MCO) to attempt to predict the Bureau of Labor Statistics payroll numbers.

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Interestingly, the ADP employment report provides a very tight correlation with the BLS’s revised payroll numbers. The BLS revises its payroll data twice, and the ADP number comes out before the first estimate. The BLS’s first estimate is based on roughly 70% of the establishments sampled. The second revision includes another 20% and the final revision adds another 4%. Since ADP’s numbers are based on live payroll data, they are more accurate than the BLS’s first pass at the numbers.

The ADP payroll data will correspond with the BLS’s private non-farm job numbers. The nonfarm payroll number will include public sector jobs, which must be subtracted out to make an apples-to-apples comparison with the ADP report.

Highlights of the report

Private sector employment increased by 135,000 in the month of May, while April’s numbers were revised downward from 119,000 to 113,000.  In terms of industries, professional / business services increased the most, by 42,000 while manufacturing employment dropped by 6,000. The drop in manufacturing employment comports with the ISM report and also some of the regional Fed business surveys.

Services increased by 138,000 while goods-producing companies shed 3,000. Small business accounted for 58,000 of the increase while medium and large businesses contributed 39,000. Overall, the report shows that the job market continues to expand, but the rate of expansion has moderated since the beginning of the year. Mark Zandi of Moody’s credits the tax hikes and spending cuts for the slowdown.

Implications for mortgage REITs

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Mortgage REITs like American Capital (AGNC), Annaly (NLY), Hatteras (HTS) and Capstead (CMO) have been at the mercy of the bond market sell-off that started on May 1. There really hasn’t been a single catalyst anyone can point to for the sell-off other than people have decided en masse to start taking more risk and are selling risk free assets. It isn’t only in the US either –  it has affected G7 markets in general. A good portion of the sell-off in the US has been based on fears that the Fed would begin to taper quantitative easing sometime this Fall and perhaps end it by the end of the year.

Rising interest rates lower the value of fixed income assets, especially mortgage backed securities. When rates rise, REITs take capital losses on their portfolios and because they use leverage (in other words they fund their portfolios through borrowed money) any changes in asset prices have an outsized effect on their equity. If the payroll numbers on Friday come in better than expected, a further sell-off in bonds could raise interest rates further as investors bet on recovery and the end of quantitative easing. This would be negative for the REITs.


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