KEY DATA: ADP: 179,000; 500-999 employees: -3,000/Trade Deficit: $47.2 billion ($3 billion wider)
IN A NUTSHELL: "May job growth may have been a little less than expected but with imports rising, it looks like the economy is moving forward solidly."
WHAT IT MEANS: If Friday is the employment report, Wednesday is the ADP estimate of private sector payroll gains. It was not a surprise that job growth slowed last month. The surge in April was make-up for the bad winter and when one month is odd, the next month is also likely to be strange. Indeed, it may not be until we get the June numbers that we can say that the weather-related impacts have washed out of the system. That said, the ADP numbers were below what was expected. That too is not a shock as they have been running below the BLS estimates lately. Small firms continue to add workers and if they are doing so, it can only mean that the economy is picking up steam. Small business owners have not been very optimistic about the economy, at least if you believe the National Federation of Independent Business survey, which I do. The only weakness was in the 500-999 employee firms, which actually posted a decline. Don't ask me why, though it has been suggested it reflects less temporary hiring. Don't ask for an explanation of that explanation, as I don't have one. Medium and very large companies hired solidly, which further raises questions about why this one group didn't add workers.
As for trade, the deficit soared in April to the widest level in two years. The report, not surprisingly, contains good news and bad news. Imports grew as we bought more of everything, including consumer and capital goods, vehicles and food. That points to an expanding economy. However, our exports declined and that is not a good trend. A cut back in overseas sales restrained growth in the first quarter and it is likely to do so this quarter.
Productivity weakened in the first quarter and labor costs soared, but that hardly surprised anyone. When you continue to hire but growth declines, those numbers will always look ugly. I expect a major turnaround this quarter as the economy expands sharply.
MARKETS AND FED POLICY IMPLICATIONS: The disappointing ADP job estimate is a warning that Friday's government numbers may be a little light. But I still believe they will come in above 200,000 and when you average April and May, the pace should be strong. But traders worry about today's number, not necessarily trends or special factors, so the soft ADP report and the large increase in labor costs will not make people happy. As for the Fed, the members are looking long term so these numbers will not matter very much. Indeed, there are other data coming out later today, such as the ISM non-manufacturing index and the Conference Board's May Help Wanted Online that may be watched more closely.