ADP shows improvement; are employment report projections too pessimistic?

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Although the May ADP employment report was better than expected, suggesting "the worst" might be over within the private sector, Friday's employment report will give a clearer read of the labor market.

Total nonfarm private employment decreased by 2.760 million in May, after 19.557 million jobs were lost in April, ADP said Wednesday.

“The impact of the COVID-19 crisis continues to weigh on businesses of all sizes,” said Ahu Yildirmaz, cohead of the ADP Research Institute. “While the labor market is still reeling from the effects of the pandemic, job loss likely peaked in April, as many states have begun a phased reopening of businesses.”

Economists polled by IFR Markets expected a decline of 9 million jobs.

“The worst of the COVID-19 blow to the labor market might be over as private sector employment declined by just 2.76 million in May,” said Scott Anderson, chief economist for Bank of the West. “This was well above expectations for a 9.0 million decline and down from 19.6 million in April. Private sector payrolls are down 22.6 million or 17.5% from the February peak, according to ADP data.”

He added, "The above consensus ADP employment decline suggests our forecast for total nonfarm payrolls to shrink by 10.0 million when the official BLS report is released on Friday might be too pessimistic."

The economists at Morgan Stanley agree that Friday’s numbers may not be as bad as projected.

“We expect May total nonfarm payrolls to decline by a net of 3.5 million and the unemployment rate to rise to 17.0% from 14.7% in April,” they wrote in a note. “In reality, the shadow employment rate, which includes people absent from work for other reasons, is likely much higher as we believe it was closer to 22.1% in April.”

Economists polled by IFR Markets expect payrolls to be down 8.250 million and the jobless rate to rise to 19.7%.

Not everyone is optimistic.

“The forthcoming May jobs report will amount to a shocking sequel to the April horror story,” said Mark Hamrick, senior economic analyst for Bankrate.com. “It is likely to add further economic insult to the injury already established with the jobless rate, officially at 14.7% in April, expected to move closer to 20%. Millions more are expected to fall off of payrolls.”

With the economy beginning to reopen, the peak of unemploymnet may be near, but "we will only know by looking in hindsight," he said.

“The nation’s unemployment rate is expected to remain elevated in the high single digits next year while economic output isn’t likely to be restored to its pre-pandemic level until 2022,” Hamrick added. “It isn’t just that the unemployment rate is at historically high levels. There are many millions more Americans whose difficult plight isn’t captured by this statistic, between those who have dropped out of the workforce (not counted as jobless) and part-time workers who want full-time status.”

ISM Non-Manufacturing
The Institute for Supply Management's non-manfucturing sector index improved to 45.4% in May from 41.8% in April, the second consecutive month it showed contraction.

Economists expected the index would rise to 44.0%.

The new orders index grew to 41.9% from April’s 32.9%. Production soared to 41.0% from April’s 26.0%. The employment index climbed to 31.8% from 30.0%. The prices index rose to 55.6% from 55.1%, while inventory sentiment decreased to 55.1% from 62.6%.

Factory orders
Factory orders fell 13.0% in April after an 11% decline a month earlier, according to data released by the U.S. Census Bureau on Wednesday.

Economists polled by IFR Markets expected it to be down 12.5%. Orders have fallen three of the past four months.

Shipments dropped 13.5% in the month, the fourth straight decrease, after a 5.5% slide in March.

Unfilled orders slid 1.6% after a 2.1% decrease in March.

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