Macroeconomic indicators: ADP report - the condition of the American labor market

The ADP report is one of the most important reports on the condition of the US labor market. It collects data on the estimated change in employment in the United States. It is worth remembering that the data presented in the report concern non-agricultural employment.

Reports on the American labor market

Several reports examining the condition of the American labor market are published in the United States. Reports are published by both US government agencies and private institutions. The most popular indicators prepared by the US Department of Labor (United States Department of Labor) NFP report (Non Farm Payrolls).

ADP report

The aforementioned report is prepared on the basis of data collected by Automatic Data Processing Inc. The company is listed on the US stock exchange and is one of the components the S&P 500 index. According to the investor presentation, ADP supports companies employing approximately 22 million employees (1/6 of the American labor market). The company offers software that supports HCM (Human Capital Management), i.e. processes related to recruitment or payment of salaries. Due to the fact that the company serves American companies operating in many industries, changes in employment in companies are reported by Automatic Data Processing "on an ongoing basis". The report is prepared using Moody's Analytics.

Due to the fact that the data is aggregated "on the fly", the ADP report appears two days earlier than the government data. For this reason, it is the first "test" of the condition of the labor market. It is followed by more detailed and comprehensive government data published in the NFP report.

What does the ADP report include?

The ADP report presents data on the condition of the US labor market. The data relates only to the US private sector. However, keep in mind that ADP data does not include the agricultural sector. It is worth noting, however, that the agricultural sector has a marginal share in generating the Gross Domestic Product. However, the advantage of this solution is that the governmental NFP report also does not include data from the agricultural sector. 

ADP National Employment Report® is published monthly and collects data from 460 US companies employing over 000 million employees. The ADP methodology is consistent with the US Bureau of Labor Statistics (BLS), so the reports have similar readings. The Non Farm Payrolls (NFP) report is published on the first Friday of every month. ADP is issued two days in advance (Wednesday).

The data published by ADP National Employment Report® is also broken down into company size and the market in which it operates. In addition to the collective information on the change in employment, the report also shows the employment dynamics in the following employment range:

• 1-19 employees;
• 20-49;
• 50-499;
• 500 - 999;
• Above 999.

Another breakdown of the presentation of results is the publication of employment changes in the industrial and service sectors. In addition to the collective breakdown, the ADP report contains information about changes in employment in individual sectors. Among them, the following can be mentioned:

• The construction sector;
• Raw material industry;
• Manufacturing sector;
• Trade, Transport and Utilities;
• Financial sector;
• Education and Healthcare.

Exemplary report

On June 2, 2021, the ADP National Employment Report® for May 2021 was published. According to the data of a private company, almost 2021 million new jobs (1) were created in May 978. The largest increase was recorded in the service sector, where employment growth was estimated at 000 employees. The defrosting of the US economy was very visible in the leisure sector (travel, hotels), where employment increased by 850 in a month. 

The report also included information on employment broken down by company size:

Source: own study based on the ADP report

Covid-19 times

In response to the spread of the SARS Cov-2 virus in the United States, "economic shutdown" has been introduced on a large scale. As a result, service premises did not function normally for a long time and many companies were forced to reduce employment. As a result, significant changes in the level of employment took place between April and June 2020. In April 2020, the ADP report indicated a reduction in employment by approximately 19,4 million. In May and June, on the other hand, some employment was rebuilt. In May, companies increased employment by approximately 3,2 million, while June 2020 ended with an increase in jobs by 4,4 million. In the following months, the labor market was rebuilt, but the overall level of employment is still 7 million below the employment in March 2020 (122 million vs 129 million).

Employment growth

In a situation where the ADP indicator shows an increase in employment, a conclusion can be drawn about the development of the economy. There is an effect "Flywheel", i.e. the demand for labor increases employment, which in turn increases the income of households. As a rule, the effect of getting richer population translates into an increase in consumption. This, in turn, increases aggregate demand in the economy, which improves the health of certain sectors of the economy.

Employment decline

In a situation where the APD index records a decline in employment, it means that the economy "Cooling down". Employment is reduced, which translates into a reduction in income in some households. As a result, consumer spending decreases, which reduces the demand for individual products. This puts pressure on such firms to decline in revenues, which some firms need to cut capital expenditure and reduce debt.

ADP report - important trend and expectations

Of course, the increase in employment itself can be interpreted as a negative signal. This may apply to situations where employment growth is lower than market expectations. In such a situation, it may cause the economic recovery to be weaker than the expectations of investors and professionals. The opposite situation is when the market may react positively despite the negative result. This is when the ADP report exceeds market expectations (eg ADP shows  -100 and the market expected -000).

What is the report important for investors?

The ADP report is an important indicator that gives an insight into the situation in the US labor market. Changes in employment are a valuable measure of the condition of American companies. If companies expect an improvement in their own situation (more orders, clients), they will be willing to increase employment. In the event of a deterioration in the economic situation, enterprises may reduce some of their employment to reduce wage costs.

For investors, in addition to the fundamental aspect, ADP can also be a measure of market sentiment. When the stock market rises, despite the poor reading of the report, it proves the strength of the market, which can "ignore" negative news. On the other hand, market weakness occurs when the market does not react to positive information or even declines despite a better-than-expected reading.