As investors, we often look to the ADP National Employment Report for insights into nonfarm private employment trends in the U.S. Since its inception in 2006, ADP’s data, covering about one-fifth of all privately employed individuals, has served as a prelude to the Bureau of Labor Statistics’ more comprehensive employment report. But should we place our trust entirely in these figures, especially when making critical investment decisions?
Given its narrow focus on nonfarm, private employees and the methodology based on payrolls of ADP’s client companies, the report’s accuracy in portraying the entire job market can be questionable. Without including government employment data, like the BLS does, ADP’s report offers an incomplete picture. And while government jobs numbers seem to only increase in this crazy environment, there are plenty of instances where BLS surprises to the downside when ADP suggested quite the opposite.
In 2013 for example, the average divergence between ADP’s forecasts and the initial BLS report over a seven-month period stood at around 42,286 jobs.
Given these considerations, investors should approach ADP’s reports with a degree of skepticism.
Why You Can Probably Ignore the ADP Payroll Report
While ADP’s data offers valuable regional and industry-specific insights — making it a critical resource for corporate economists and regional Federal Reserve banks — it is essential to remember that these reports are not designed to predict the BLS’s subsequent releases. Instead, they serve as an independent gauge of employment trends.
The release of the ADP report can clearly drive short-term movements in various asset classes. But these reactions might be very misguided. Ignoring the comprehensive data provided by the Bureau of Labor Statistics in favor of ADP employment figures can lead investors to overlook the nuanced dynamics of the U.S. labor market.
Furthermore, disregarding BLS numbers may result in an incomplete understanding of economic trends due to factors like the “underground economy” and methodological discrepancies between surveys.
So here we are in April, and ADP reported that American businesses added about 184,000 jobs in March. Wow! Economists were wrong in estimating it would be closer to 155,000. But really who cares given the limitations of the data?
I’d rather watch intermarket trends to tell me more about the state of the jobs market and economy. I’d rather watch gold, utility stocks, and Treasurys as signals than watch largely irrelevant data. And I’d rather you do as well.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
