Amazing ADP Report- Economy Could Run Hot

The labor reports have become more important lately because they help us determine if the economy is running hot. A bad report is usually considered a one-off event. It’s sometimes blamed on the weather; investors expect it to be revised higher. A solid report is the sweet spot because it signals the economy is steady, but extra rate hikes aren’t needed. This is a Goldilocks interpretation where inflation is more feared than a recession. A great report is a bit worrisome because we know it’s not sustainable and can lead to wage growth inflation.

The latest ADP report signals the economy is running hot which could be bad news for stocks. The private payrolls report showed there were 235,000 jobs created. This beat the expectation for 205,000 jobs created. Last month’s report was revised 10,000 higher to 244,000. This is the 4th straight month the report showed job growth of at least 200,000.

The labor market report on Friday is expected to show 222,000 jobs created and for the unemployment rate to fall from 4.1% to 4%. The BLS report is taken more seriously than the ADP report which means we are potentially getting an advanced reading of how stocks will react on Friday. We could see inflation estimates increase. The ‘running hot’ trade could come back in style which means utilities decline and tech rallies. It all depends on how the results come in versus expectations.

Mid-sized businesses added the most jobs as they hired 97,000 people. Small firms added 68,000 jobs and large firms added 70,000 jobs. The small firms have been claiming they are desperate to hire workers, but we haven’t seen a bump up in their job creation. That’s probably a good thing because if they were to hire more workers, the labor market would fill up quicker. While I don’t expect a completely filled labor market until mid-2019, that projection will be moved closer if the labor market adds more jobs than I expect.