6/3/2015
By Jennifer Coombs

ADP estimates that private payrolls increased by a moderate 201,000 in May which was roughly in-line with the consensus estimate of 200,000. This compares with the relatively low 169,000 jobs added back in April and the 189,000 jobs added in March. For comparison purposes to the data from the Bureau of Labor Statistics (BLS), the consensus estimate for private payrolls is a bit higher at 215,000 and the low-end of the consensus range is around 185,000 jobs. Ultimately, ADP sometimes gets it right, other times it is way off the mark – last month ADP signaled a really disappointing April report but the BLS report turned out to be rather respectable.

When broken down by sector, there is a very wide gap between the producing and services industries. However, the overall change in small business hiring during the month is huge and very encouraging to us. ADP estimates that well over 100,000 jobs were added to businesses with 1-49 employees, while medium-sized businesses gained some respectable ground, but the large corporations (over 500 employees) slowed significantly during the month. This could also be related to the jobs cuts associated with oil and gas drillers due to lower oil prices. While over 27,000 new jobs were added to the construction sector, there was a loss of 5,000 jobs in the manufacturing sector – both of which are evident in the recent economic reports on housing/construction and manufacturing. For the service sector, 56,000 trade, transportation and utilities jobs were added, as well as 12,000 in the financial sector and 28,000 in the professional/business related-sector.

Aside from ADP, there were two other major domestic economic releases that are pointing to modest improvements in the economy…or should we say, improvements over the prior month. Firstly, it’s very likely that there will be another lift for Q2-2015 gross domestic product (GDP) estimates since there will be a hefty decline in imports. In April 2015, the US trade gap narrowed to a deficit of $40.9 billion. This gap is on the low end of expectations, and compares with March’s outsized revised gap of $50.6 billion. That reading was distorted by a spike in imports tied to the Port of LA and Port of Long Beach strike issues, which were resolved before the end of Q1-2015. Imports declined by 3.3% in April to a total of $230.8 billion while exports increased by 1.0% to $189.9 billion – another positive sign for Q2 GDP estimates. Consumer goods showed the strongest improvement on the import side, down $4.9 billion in the month and reflecting a $1.3 billion decline in cell phones as well as declines for apparel and furniture. The import of capital goods, industrial supplies, and autos also fell, while the imports of petroleum products increased to $15.4 billion, more than offset by a $0.9 billion rise in petroleum exports to $8.6 billion. Another plus in the report is another gain for the nation's services where the trade surplus rose to $19.8 billion from $19.4 billion in March (it’s discussed in further detail below). The decline in imports was certainly expected given the port strikes in March; however the gain for exports is very good and suggests an easing in dollar-related troubles which many companies expected to last for the rest of the year.

Additionally, the Institute for Supply Management (ISM) provided its second reading on the economy for the week, this time for the service sector. ISM’s May reading for the non-manufacturing purchasing managers’ index (PMI) came in solid at 55.7, but was at the low-end of consensus expectations. Despite being well above the 50-breakeven level, this is still the slowest monthly growth rate since April of last year. Key readings all slowed slightly, but are still quite solid with new orders at 57.9 and business activity at 59.5. Employment slowed slightly, down 1.4 points to 55.3, but this rate is still respectable and shouldn’t be a positive for Friday’s jobs report.  Additionally, prices paid, likely tied to higher fuel costs, showed some pressure and increased by 5.8 points to a reading of 55.9 – the highest since August 2014. On an individual industry basis, there was particular strength in the arts/entertainment/recreation sector, as well as in management and support services (this is one of the strongest export industries in the US). Also for housing, there is yet another hint of strength, with both real estate and construction beginning to show strength. Mining was the only one of the 18 surveyed industries contracted in the month, and continues to be hurt by low commodity prices. The hawks in the Fed are definitely going to take notice of the rise in prices, though the dip in employment should offset their case. Overall the report is a positive one, and points to a modest deceleration in the central strength of the economy – the services sector.

Jennifer Coombs
Wall Street Strategies

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