Jobs at businesses grew by robust 253,000 in May, ADP says

Paul Davidson | USA TODAY

Economists are looking for another month of solid job growth in Friday’s employment report, but experts say even a weak showing is unlikely to stop the Federal Reserve from raising interest rates this month.

Expectations for the report were heightened after payroll processor ADP on Thursday estimated that businesses added a blockbuster 253,000 jobs in May, well above economists’ median estimate of 180,000. Economists surveyed by Bloomberg expect the Labor Department on Friday to tally 180,000 new positions in the public and private sectors.

ADP tries to predict Labor’s reading but has varied from it by a median of 32,000 the past two years, according to Jim O’Sullivan, chief U.S. economist of High Frequency Economics. Unlike Labor’s report, ADP doesn’t account for the weather-related volatility that skewed payroll totals the first four months of the year. That’s because ADP counts workers as employed as long as they’re on the payroll while Labor includes them only if they show up for work during the week it conducts its survey.

As a result, ADP sharply overestimated employment in March, when harsh weather suppressed gains in Labor’s survey, says economist Ian Shepherdson of Pantheon Macroeconomics. Similarly, ADP missed the bounce back that Labor recorded in April

Shepherdson, however, believes the weather effects have faded, and so ADP could be a better predictor of the labor market’s performance in May.

O’Sullivan, however, is forecasting just 140,000 job gains because of seasonal adjustment challenges that Labor often faces in May. Such a blip, he says, would not undermine a steady labor market that he believes will churn out an average 175,000 jobs a month the rest of the year.

A disappointing showing, he adds, also would not deter the Fed from bumping up its benchmark short-term interest rate by another quarter percentage point at a mid-June meeting.

“I think it’s going to be hard to stop the Fed (from lifting rates) at this point,” O’Sullivan says.

Now that obstacles such as China’s economic troubles and the oil sector slump are past, Barclays economist Michael Gapen has said the Fed will likely carry out its plan for two more rate increases this year barring unusually weak economic data.

O’Sullivan says a string of weak job gains combined with a rise in the unemployment rate could prompt Fed officials to dial back its blueprint to just one more hike this year, while the opposite dynamic could coax them into three more rate increases. The Fed lifted its key rate in December and March after just one hike the previous decade.

The 4.4% unemployment rate is already below the Fed’s long-run forecast of 4.7% — a level that it believes could be sustained without excessively pushing up inflation. Theoretically, a further drop on Friday would increase pressure on Fed policymakers to raise rates more rapidly. But in recent months, average pay increases have moderated to 2.5% a year and the Fed’s preferred measure of inflation has fallen a bit further below its 2% annual target.

“To some extent, (the low unemployment rate and tame inflation) offset each other,” O’Sullivan says. On the other hand, he says, if Friday’s report reveals another decline in unemployment combined with an acceleration in wage increases, some Fed officials could step up their rate hike forecast for this year or 2018.

ADP’s report showed that professional and business services led the May payroll gains with 88,000. Trade transportation and utilities added 58,000; education and health care, 54,000; and construction, 37,000. Manufacturers added 8,000 jobs in a sign the industry continues to stabilize amid an improving global economy and rebounding oil sector.

Monthly job growth has averaged 185,000 in Labor’s report so far this year, up from 180,000 in 2016 but below the 226,000 pace posted in 2015. Economists believe the 4.4% unemployment rate, a 10-year low, will slow payroll gains further in 2017 as employers struggle to hire workers. That, however, should force firms to step up pay increases.