ADP Employment Data: Impact on Federal Reserve's December Decision

Key Takeaways:

• Anticipation for the release of November's ADP private sector employment data.
• Divergent forecasts among economists regarding the labor market's strength.
• Potential impact on the Federal Reserve's interest rate decision in December.
• Other labor market indicators showing mixed signals.

At 9:15 PM Beijing time on Wednesday, payroll processing company ADP will release the latest U.S. private sector employment data, which is expected to show the labor market remained relatively stable in November. With Federal Reserve officials having less economic data on hand than usual, this could spark further division as officials set interest rates next week.

Economists surveyed by FactSet expect U.S. private sector employers to have added 40,000 new jobs in November, but the Bloomberg consensus forecast is for growth of just 5,000.

The U.S. private sector added 42,000 new jobs in October, with the education and health services industries, as well as the trade, transportation and utilities industries, leading the gains. However, since the release of the October private employment data, ADP's weekly employment data has found that employers continue to lay off workers. For example, ADP reported that in the four weeks ended November 8, private employment fell by an average of 13,500 jobs per week.

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

Because the U.S. Bureau of Labor Statistics (BLS) won’t release October and November employment data until December 16 (i.e., after the Federal Open Market Committee meeting next week), the labor data released by ADP on Wednesday is likely to play an outsized role. The delay stems from the government shutdown — during the funding interruption, U.S. statistical agencies like 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 good at predicting monthly private employment estimates over the past year.

If the more optimistic FactSet consensus forecast for November employment is accurate, and private employment growth proves to be more resilient than some recent employment data has indicated, then this could put Federal Reserve officials in a policy-making bind ahead of their December 9-10 meeting.

Although Federal Reserve Chairman Jerome Powell said at the October meeting that a December cut to the federal funds rate was not a foregone conclusion, several 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 sees room for a rate cut “in the near term.” Fed Governor Christopher Waller and San Francisco Fed President Mary Daly (a non-voter this year) have more explicitly advocated for a rate cut at the December 9-10 meeting, citing vulnerabilities in the labor market.

All of this suggests that the latest employment data from ADP could be a key factor for officials and investors to assess the probability of a December rate cut. If the data does not show a clear decline in employment, then Federal Reserve officials concerned about inflation remaining above its 2% target may have more reason to believe that holding rates steady next week is the right path forward.

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

The “jobs differential” in the Conference Board’s consumer confidence data (which measures the difference between the number of Americans who believe jobs are plentiful versus those who believe jobs are hard to get) stabilized in November. The percentage of consumers who reported that jobs were hard to get fell slightly from 18.3% in October to 17.9% in November.

HR services giant Paychex noted in its Small Business Employment Watch that employment at small businesses with fewer than 50 employees also ticked up slightly in November. The index rose 0.11 percentage point from October to 99.38, indicating that employment conditions stabilized during the month.

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

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