What is the ADP National Employment Report?
Automatic Data Processing (or ADP) is a global provider of business outsourcing. It provides a range of services, from human resources to payroll. The ADP National Employment Report, published monthly by the ADP Research Institute, is a monthly preview of the U.S. Bureau of Labor Statistics’ (or BLS) jobs report. 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 predict the U.S. Bureau of Labor Statistics’ payroll numbers.
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’re more accurate than the BLS’s first pass at the numbers.
ADP payroll data correspond with the BLS’s private nonfarm job numbers. The nonfarm payroll number includes public-sector jobs. We need to subtract these in order to make an apples-to-apples comparison with the ADP report.
Highlights of the report
Private-sector employment increased by 207,800 in November 2014. October’s number was 232,500. In terms of industries, transportation increased the most, by 49,000, while financial employment increased by a small amount.
Services increased 176,000, while goods-producing companies added 32,000. Construction added 17,000 jobs. Small businesses accounted for 101,000 of the increase, while medium and large businesses contributed 65,000 and 42,000, respectively. Overall, the report shows that the job market continues to expand and could be accelerating. But you should keep in mind that one point doesn’t constitute a trend.
Implications for mortgage REITs
Mortgage real estate investment trusts (or REITs) such as American Capital Agency (AGNC), Annaly Capital Management (NLY), Hatteras Financial (HTS), and Capstead Mortgage (CMO) are heavily influenced by interest rates, and the Fed is focusing on the labor market in particular. While payroll growth probably isn’t enough to get the Fed to hike rates, wage growth will.
Rising interest rates lower the value of fixed-income assets, especially mortgage-backed securities. When rates rise, REITs take capital losses on their portfolios. Because they use leverage, or in other words, 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 sell-off in bonds can raise interest rates further as investors bet on recovery and the the timing of “normalization,” the Fed’s term for raising rates off the zero bound. This would be negative for REITs. Investors who want to take directional bets on interest rates should look at the iShares 20-year Treasury exchange-traded fund (or ETF) (TLT).