Assessing the ADP jobs report: What’s in it for investors?
Why should investors follow the ADP jobs report? (Part 5 of 8)
The ADP jobs report
By tracking jobs, investors can sense the degree of tightness in the job market. This tightness gives an indication as to the inflationary pressure on wages. A tight job market is basically a situation where the number of qualified workers is less than the number of jobs available in the market. So the labor market has more jobs than workers, leading to an upward (or inflationary) pressure on the wage rate.
Alternatively, in the case of slack in the labor market, the reverse is true. The labor market has more workers chasing fewer jobs, leading to a squeeze on the wage rate.
If wage inflation is a threat, it’s a good bet that interest rates will rise. The rise in interest rates may result in a fall in bond prices, as interest and bond prices share an inverse relationship. In contrast, when job growth is slow or negative, central banks may lower interest rates to boost the economy, resulting in a rise in bond prices.
The jobs report should be taken in conjunction with market expectations. For example, if the market expects 100,000 jobs to be added in a particular month and the report shows only 50,000 were added, it’s a negative in spite of clocking positive figures.
While looking for economic indications from the jobs report, we need to compare trends over time. A single month’s report isn’t an indicator of the economy, since the jobs number is volatile on a month-to-month basis. In fact, most economists look at the trailing three-month average at a minimum, and often, they’ll gauge growth using 12-to-24-month trends.
The performances of popular exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF), which track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM), serve as a good indicator of the course the U.S. economy is taking.
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