Why the Fed’s closely watching the BLS and ADP payroll reports

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Labor market indicators: Automatic Data Processing & Bureau of Labor Statistics payroll additions

Few economic releases generate as much reaction from both stock (SPY)(IVV) and bond (BND) markets as the employment reports issued by Automatic Data Processing (or ADP) and the Bureau of Labor Statistics (or BLS). Both these reports have become even more important following the Great Recession. Buoyant labor markets are vital for a sustained economic recovery. These reports can have a significant impact on your ETF investments.

The National Employment Report by Automatic Data Processing (or ADP-NER) and Moody’s Analytics (or MCO) for August will be issued on Wednesday, September 3. The BLS’s Employment Situation report will release on Friday, September 5.

The ADP-NER releases a couple of days before the BLS report. It gives markets a heads-up on the BLS figures. The ADP-NER covers monthly job creation statistics in the private sector. The BLS release covers payroll additions in both private and government sectors.

Highlights of July’s releases

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  • The ADP report estimated private payroll additions of 218,000 in July. The BLS report put the figure at 198,000 for the private sector, and 209,000 overall. Payroll additions in July exceeded average monthly additions in 2014 for both the BLS and ADP reports.
  • The BLS reported a slightly higher unemployment rate of 6.2% in July, up from 6.1% in June. The improving economy had more workers joining the labor force. This increased the participation rate and also the unemployment rate.

Implications of major labor releases

The Fed’s monetary policy hinges on two important variables: inflation and unemployment. If unemployment falls sufficiently, the Fed would likely follow a quicker path for increasing the Fed funds rate. A rate increase would affect bonds across the rates and maturity spectrum, including Treasuries (TLT), investment-grade bonds (BND), and high yield bonds (JNK). The SPDR Barclays Capital High Yield Bond ETF (JNK) invests primarily in high yield or junk bonds.

Stocks, on the other hand—especially consumer discretionary sector stocks—usually benefit from labor market improvements.

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