ADP Report Misses Estimates: Stock Market Doesn’t Care At All

Disappointing ADP Report

The private sector payrolls report from August was disappointing as there were 428,000 jobs added instead of 900,000. However, this is still more jobs created in a month than usual in recoveries. The unemployment rate is about to fall below the peak in the last recession. We can start to have a normal recovery pace now. It wouldn’t be a disaster if the unemployment rate steadily fell over the next few quarters (opposed to sharply falling like it has in the past few months).

As you can see from the chart below, ADP payrolls are 8.7% below the previous peak which is slightly worse than the trough in 2010 (trough was -7.4%). It's possible the stock market ignored the report because ADP completely missed the July reading. It originally showed there were 167,000 jobs added. It was revised higher to 212,000, but that’s still way below the BLS report which showed 1.462 million. That could be revised lower, but it won’t be revised lower by over 1 million.

Before getting into the details of the ADP report, let’s look at expectations for Friday’s BLS report. Consensus is for 1.4 million jobs created, a 9.8% unemployment rate, and 1.358 million private sector jobs created. It's surprising that the government is only expected to create 42,000 jobs because the census likely created more jobs. It’s estimated that there were 230,000 temporary census workers. 

The chart below shows the recent data. Regardless, over 1 million jobs added would be a huge win. Unemployment rate will be back in the single digits. Labor force participation rate is expected to rise from 61.4% to 61.6%. If it stays the same, we could see the unemployment rate fall into the mid 9s. You would think a lot of jobs were created since Redbook same store sales growth improved so much.

Details Of August ADP

There were 52,000 small business jobs created, 79,000 created by mid-sized firms, and 298,000 by large firms. Therefore, if the BLS report beats ADP’s reading, it will likely be because small firms did better than ADP calculated. Very small firms created 43,000 jobs and other small firms created 9,000 jobs. Given the outperformance of large firms, you would have expected very small firms to do worse, but they didn’t. That’s a good sign since they are the most vulnerable. They don’t have access to capital like large firms do.

Goods-producing firms added 40,000 jobs. The biggest weakness was in the service providing firms that added 389,000. It needs to add much more jobs relative to manufacturing since it is a bigger employer. August ISM report showed manufacturing is rebounding, but its employment reading was still below 50. ISM services PMI is expected to be 57 which is down from 58.1. It wouldn’t be surprising if it beats estimates.

The information industry lost 1,000 jobs in the ADP report. This is why it's unlikely that a 30% crash in the Nasdaq and a greater than 50% crash in some of the high flying stocks will hurt the economy much. They aren’t hiring many employers even though they are doing well. It would be better if the cyclicals did well because they employ more people. 

Leisure and hospitality added 129,000 workers. There is still more to improve. When travel improves, we will get another spike in employment in this industry. Flying is still down about 70% yearly.

Education and healthcare added 100,000 workers. Hospitals are starting to do better since people aren’t flooding them due to COVID-19. People are starting to get elective surgeries again. Unfortunately, just because these procedures are elective, doesn’t mean they aren’t needed. There was a massive health effect on people who didn’t get the checkups and surgeries they needed. Finally, professional and business added 66,000 jobs.

Auto Sales Continue To Recover

August auto sales report supported the Redbook same store sales results as sales increased from 14.6 million vehicles to 15.2 million as you can see from the chart below. Sales fell below the previous recessionary trough for one month, but now they are where they were in 2013 which was 4 years into the recovery. Labor market hasn’t improved that much.

We saw a burst in auto sales because people stopped flying, going in Uber/Lyfts, and using public transportation. North American made sales were 11.9 million which was up from 11.2 million. Investors wonder if Tesla’s stock will crash when the rest of the auto industry recovers because its market share will diminish. 

Tesla temporarily grew its share because it launched the Model Y and opened a factory in China. This outperformance doesn’t make Tesla pandemic resistant like many think. When competition increases in the next few years, Tesla’s position will further erode.

COVID-19 Update

Deaths are likely much more important to follow than cases because Abbott’s rapid tests are about to go out in the next 2 weeks. It's curious what that does to the number of new cases, the positive rate, and the spread. We could get a full view of the virus by the end of the year when almost everyone is tested. If some people who have the virus stay inside, we could virtually eliminate its spread this year, making a vaccine less important. There were 1,062 deaths on Wednesday which was down from 1,289 last Wednesday.

Conclusion

The August ADP report missed estimates, but the stock market didn’t care probably because it was terribly wrong last month. It would be fantastic if there were over 1 million jobs added in August. The auto industry is rebounding which could actually be bad for Tesla’s stock because it will lose market share. Abbott’s testing will start in September which could slow the spread of the virus. There were fewer deaths compared to last week, but that’s not enough to get people fully back to normal.