Monthly ADP Employment Numbers Indicate Strong Economic Growth

Private sector, non-farm employment added 253,000 payrolls this May of 2017, the ADP Employment Report claims. Highlights of the survey include: 113,000 jobs added in medium sized business (50 to 499 employees), 88,000 added in business and professional services, and 37,000 added in construction. Whopping growth across the boards, with only the Information sector and leisure/hospitality sector shedding jobs, by 8,000 and 11,000 respectively. This is on top of the estimated 174,000 payrolls added the previous month, showing consistent and positive growth in the labor sector.

Tanner McGrath’s official (and highly professional and knowledgeable) analysis of these numbers: All good news! Wall Street was only estimating we would add around 180,000 payrolls in May, and ADP’s current estimates blow those numbers out of the water. Unemployment continues to drop below decade lows, currently at 4.4%, and probably dropping near 4% pending the accuracy of this report. However, it is important to note the labor force participation rate is approaching a “four-decade low” (although it only dipped slightly in April, to 62.9%). The low participation rate is synonymous with labor shortages, possibly squeezing the labor market, but more on that later.

Wage growth is stable, around 2.5%. Better wage gains were economically expected from the high job growth, but have largely failed to materialize. Hopefully the aforementioned tightening labor market and a shift towards better paying jobs will increase that number for American workers.

Two more pieces of awesome information: average payrolls added according to the ADP has been around 215,000 monthly over the past 12 months, and, according to Moody’s Analytics’ chief economist Mark Zandi, “[t]he current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force.” Zandi provides his take on all the May statistics I have recapped in this CNBC interview, embedded below.

Also, relating to the first piece of information, here is ADP’s cool graph of the monthly added jobs over the last 12 moths:

Source- ADP LLC, Moody's Analytics 

Source- ADP LLC, Moody's Analytics 

Diving a little deeper into the numbers: the 88,000 added payrolls in professional and business services sometimes indicated broader strength in the workforce, “since these services are relied on by many industries”.  As Zandi said in the video, the consistent 2% growth in GDP we have seen over the last 7 years have consistently led to around 200,000 added jobs per month, meaning this month’s numbers even surpass the already positive track the U.S. economy is running. He also touched upon the possible average error of plus/minus 40,000 added payrolls in the report, wherein worst case scenario we are still over 200,000 added jobs in May (the error in April’s report was only 3,000).

May’s employment numbers was one of the last pieces of information relevant to the Federal Reserve’s strong incentive to raise the benchmark interest rate. The above average numbers indicate a business cycle expansion, possibly to full employment, and with the ever increasing National Debt Clock, the Fed can raise their rates on loans. All this just means that the US Government has trust in the strength of the economy, and can use the rates to tame uncontrollable growth. Additionally, this will be the third time in three months the fed hiked their rates.

Why do you care when the Fed raises the cost of borrowing their money? A couple of reasons: A) Watch your credit cards. “Credit card rates will mimic what the Fed does”, and with an adjustable rate (which you probably have), your rates will ascend in proportion to the Fed’s increasing benchmark rate. B) Going back to school? Student loans with variable rates will become more expensive, hiking up with the Federal rate. C) Mortgage rates tend to go up, although not automatically based on what the Fed does. D) “If you have a home equity line of credit, the interest rate you pay will climb” with it.

I’ll be closing this month’s column by rounding back to the tightening labor market. As said before, the economy is moving toward full employment as the unemployment rate continues to drop to the lowest levels in decades. However high the strength and optimism in the economy is, more and more employers are finding trouble finding, and then retaining, skilled employees. Macroeconomics 101 predicts two main things from this: 1) As demand for labor increases, and supply of it decreases, wages should rise. And 2) This could indicate future inflation, as prices rise with wages. This is specifically relevant for the construction sector, because President Trump’s new $1 trillion dollar infrastructure “splurge” would collide with the high shortage in skilled construction laborers.

Conclusions: Watch your line of credit, get a fixed-rate mortgage, and if you do take out student loans at higher rates, go to trade school and get Mr. President to include you in the public sector construction frenzy.