This week's Automatic Data Processing (ADP) private payrolls report produced a huge number versus expectations. 250,000 jobs added versus an expectation of 190,000. That was the best ADP number since March of 2017. Not only did the number beat expectations, it beat the highest single estimate in a Rueter's poll of economists, which was 220,000. Based off of that strong number, the Dow Jones Industrial Average closed above 25,000 for the first time ever, ending up .61% on the day. The Dow, the S&P 500, and the Nasdaq all closed at new record highs.Nonfarm payrolls (NFP) comes out on Friday and as I wrote in my last piece, this is the most important NFP of the year given its effect on the month of January and the "January Effect" on the overall stock market. With ADP coming out so strong and the markets rallying to new record highs, it would be natural to assume that NFP would also be strong, but that isn't always the case. The two employment numbers are very different and don't always correlate.
Moody's Analytics, which partners with ADP in releasing the ADP private payrolls report, gets the actual ADP payroll files, given that ADP's client base includes about one-fifth of the U.S. private payroll employment. The data from the ADP payroll files are compiled into time series, beginning in 2001. The data is then processed over a number of steps, which includes: removal of extremes, identifying clients by industry and company size, the creation of matched pairs, seasonal adjustments, and adjustments to match the industry and size distribution of the BLS's employment data. The BLS survey, on the other hand, is done under the Current Employment Statistics program. This program surveys about 147,000 businesses and government agencies, representing 634,000 individual worksites. Data gathered includes employment, hours and earnings. While a growing economy should benefit either survey, the last 3 years has not shown an inspiring level of correlation between the two.
There is a general correlation in direction, but there is plenty of divergence from month to month. So don't be too sure that NFP will deliver a blowout headline number just because ADP did. Just focus on the wage components and watch bond and note yields to see if stocks will finish the day, month and year higher or lower.