Stocks climbed slightly higher this morning despite a major private payroll “miss.” The ADP employment report, which is released several days before the jobs report each month, revealed that the US economy only added 374,000 jobs in August.
And while that’s an improvement over July’s 326,000 payrolls add, it’s also well short of the 638,000 job consensus estimate.
“Our data, which represents all workers on a company’s payroll, has highlighted a downshift in the labor market recovery. We have seen a decline in new hires, following significant job growth from the first half of the year,” said ADP chief economist Nela Richardson.
“Despite the slowdown, job gains are approaching 4 million this year, yet still 7 million jobs short of pre-COVID-19 levels. Service providers continue to lead growth, although the Delta variant creates uncertainty for this sector. Job gains across company sizes grew in lockstep, with small businesses trailing a bit more than usual.”
It shouldn’t surprise economists to see that small businesses struggled to hire new workers. Strong government stimulus and unemployment programs have caused a major US labor shortage.
Businesses with less than 50 employees were the most affected over the last few months.
In August, most of the jobs added came by way of the leisure and hospitality industries (+201,000), which made up for more than half of the total monthly payroll gain. Education and health services trailed at a distant second (+59,000) while construction was third (+30,000).
“The delta variant of COVID-19 appears to have dented the job market recovery,” explained Mark Zandi, chief economist at Moody’s Analytics.
“Job growth remains strong, but well off the pace of recent months. Job growth remains inextricably tied to the path of the pandemic.”
For what it’s worth, ADP has underestimated the monthly nonfarm jobs report five out of the last seven months. If ADP’s findings from August are accurate, though, the Fed will be faced with a far more complex situation in terms of tapering.
Fed Governor Christopher Waller said in early August that the Fed should taper in October if the next two jobs reports showed employment rising by 800,000 to 1,000,000.
“We should go early and go fast, in order to make sure we’re in position to raise rates in 2022 if we have to,” Waller said in an interview.
“There’s no reason you’d want to go slow on the taper, to prolong it. You want to get it done and get it over.”
Again, if ADP’s estimate is close to the Bureau of Labor Statistics’ (BLS) official tally, that means the US economy will have to add 426,000 jobs in September to hit the low end of Waller’s range at 800,000 payrolls.
But what if both the August and September jobs reports come up short? That would put the Fed in a very difficult position. A deceleration in the labor market alongside persistently high inflation might mean the US is headed for a “stagflationary” finish to the year.
If that’s the case, the Fed may decide to taper, regardless of how the employment situation looks. And if Fed Chairman Jerome Powell chickens out? Inflation would undoubtedly run rampant, potentially squashing demand further while prices remain elevated.
That means investors are approaching a “bad news is bad news” scenario should the jobs report fall short of analyst estimates. Hopefully, for bulls, ADP underestimated the BLS’s official data.
Because the alternative could result in dire consequences for the economy in the coming months. And, by proxy, the never-ending bull market.