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Can Investors Keep Forecasting the Final Non-Farm Payroll Correctly?

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ADP’s non-farm payroll directions continue to be right

ADP (Automatic Data Processing) publishes the non-farm payroll for the private sector usually a day before the final non-farm payroll release by the Bureau of Labor Statistics (BLS). MTarkets usually view ADP’s non-farm payroll as a prelude to what can be expected from the BLS non-farm payroll. The BLS non-farm payroll is one of the most looked upon indicators by markets. It’s vital to the Fed’s assessment of the employment outlook in the country and monetary policy decisions.

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ADP’s June non-farm payroll numbers indicated an increase of 172,000 jobs in the private sector. The directions given by ADP’s non-farm payrolls in terms of a rise or fall in employment numbers compared to the previous months have been mostly accurate, but the magnitude of the changes concerns investors.

What about magnitude correlations?

The most recent instance of a huge difference in the two employment reports was in May. The May BLS non-farm payroll rose by a dismal 11,000, while the ADP non-farm payroll indicated a rise of 168,000 jobs in May. This month, the rise is slightly closer with the BLS non-farm payroll rising by 287,000, while the ADP non-farm payroll rose by 172,000. It’s imperative now that we look at correlations over the year. The one-year correlation between the two employment changes fell from a strong 0.65 from June 2014 to June 2015 to a moderate level of 0.45 between June 2015 to June 2016. There definitely has been a decrease in correlation, but it still remains strong enough for a decent forecast.

ADP non-farm payroll sector analysis

Looking more into ADP’s non-farm payroll report in June, the rise in jobs has been the highest in the small business segment. It saw a gain of 95,000 jobs. Based on sectors, the service producing sector jobs increased by 208,000, while jobs that produce goods fell by 36,000.

In terms of the industry perspective, trade/transportation/utilities saw a rise of 55,000 jobs, while the manufacturing segment saw the biggest loss of 21,000 jobs. The SPDR S&P Homebuilders ETF (XHB) and the SPDR S&P Metals & Mining (XME) posted gains. They rose by 2.4% and 4.2%, respectively. In terms of stocks, KB Home (KBH), Lennar (LEN), and Toll Brothers (TOL) rose by 4.1%, 3.5%, and 3.7%, respectively.

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