ADP Employment Data and Fed Policy Outlook: A December Decision Preview

ADP Data Overview and Potential Impact on the Fed's Decision

At 9:15 PM Beijing time on Wednesday, payroll processing firm ADP will release the latest US private sector employment data, which is expected to show a relatively stable labor market for November. With Federal Reserve officials having less economic data on hand than usual, this could spark further divisions when officials set interest rates next week.

Diverging Economic Forecasts

Economists surveyed by FactSet expect US private sector employers to add 40,000 new jobs in November, but Bloomberg's consensus forecast is only for growth of 5,000.

Recent Employment Trends

The US private sector added 42,000 new jobs in October, with the education and health care industries, and the trade, transportation, and utilities sectors leading the growth. However, since the release of the October private employment data, ADP's weekly employment data has found that employers are continuing to lay off workers. For example, an ADP report showed that in the four weeks ending November 8, private sector employment averaged a decrease of 13,500 jobs per week.

The Fed's Beige Book

In addition, the Fed's latest "Beige Book" noted that employment had "declined slightly." About half of the districts said that labor demand had weakened, while the New York, Dallas, and Minneapolis Feds reported that employment fell slightly from early October to mid-November.

Impact of Government Data Delays

Because the US Bureau of Labor Statistics (BLS) will not release October and November employment data until December 16 (i.e., after the Federal Open Market Committee meets next week), the labor data released by ADP on Wednesday could play an outsized role. This delay stems from the government shutdown—during the funding interruption, US statistical agencies, such as the BLS, were unable to collect, process, or release data. However, Morgan Stanley economists pointed out earlier this week that ADP's weekly data has not been effective in predicting monthly private employment estimates over the past year.

Potential Policy Scenarios

If the more optimistic FactSet consensus forecast for November employment is accurate, and if private employment growth proves to be more resilient than some recent employment data suggest, then this could put Fed officials in a decision-making dilemma ahead of the policy meeting scheduled for December 9-10.

Diverging Views Within the Fed

Although Fed Chairman Jerome Powell stated at the October meeting that a decision to cut the federal funds rate in December was not a foregone conclusion, some key members of the committee have expressed support for a rate cut in recent weeks. Most notably, New York Fed President John Williams said on November 21 that he believed there was "room" to cut interest rates "in the near term." While Fed Governor Christopher Waller and San Francisco Fed President Mary Daly (not a voting member this year) have more explicitly advocated for a rate cut at the December 9-10 meeting, citing vulnerabilities in the labor market.

Conclusion: ADP Data as a Key Determinant

All of this suggests that the latest employment data from ADP may become a crucial factor for officials and investors to assess the likelihood of a rate cut in December. If the data does not show a significant decline in employment, then Fed officials who are concerned about inflation remaining persistently above the 2% target may have more reason to believe that keeping interest rates steady next week is the right course forward.

Other Labor Market Indicators

In addition to the ADP data and the "Beige Book", several key labor market indicators have not shown a significant slowdown. For example, initial jobless claims in the US have not spiked. In fact, the latest data released last week showed that for the week ending November 22, applications for unemployment benefits fell by 6,000 to 216,000.

Consumer Confidence Data

The "jobs differential" in the Conference Board's consumer confidence data (which measures the difference between the number of Americans who think jobs are plentiful and those who think they are hard to get) stabilized in November. The proportion of consumers reporting that jobs were hard to find fell slightly from 18.3% in October to 17.9% in November.

Small Business Employment

Human resources services giant Paychex, in its "Small Business Employment Watch" report, indicated that employment at small businesses with fewer than 50 employees also rose slightly in November. The index rose 0.11 percentage points from October to 99.38, suggesting that the employment situation stabilized during the month.

Market Expectations

However, according to CME Group's FedWatch tool, financial markets currently expect the probability of a rate cut in December to be around 87%. This represents a significant shift compared to the 37% probability after the Fed's October meeting.