May ADP Jobs Estimate and April Trade Deficit

KEY DATA: ADP: 201,000; Services: 192,000/ Trade Deficit: $40.9 billion ($9.7 billion narrower)/ May Vehicle Sales: 17.8 million units annualized (up 1.4 million units annualized)

IN A NUTSHELL: “Moderate job growth continues and with the trade deficit narrowing sharply and vehicle sales soaring, it looks like we could have a really good second quarter growth number.”

WHAT IT MEANS: Maybe the economy really is as strong as I think. Yesterday, we got the May vehicle sales numbers and they were the strongest in nearly a decade. We are talking housing bubble peak time here. And with gasoline prices down, people are buying bigger, gas-guzzlers again, so the May retail sales report should be really good. Today, ADP released its estimate of private sector job growth in May and it was solid, though nothing spectacular. However, the slide in job growth looks to be over. A positive sign was that payroll gains in the services component of the economy were pretty good. This is the largest portion of the economy and if the hiring reflects improving sales, then that too points to better consumption numbers. There were some concerns raised by the report. Large firms just don’t seem to be hiring. Strong additions to payrolls had helped create the robust jobs numbers we had been getting, so the moderation in hiring in this sector is a warning that we shouldn’t expect Friday’s government payroll increase to be huge. In addition, manufacturing remains soft, but the recent Supply Managers’ numbers seem to indicate that may be changing.

One of the major reasons the economy contracted in the first quarter was a widening in the trade deficit. That too seems to be in the past. The trade deficit, which everyone thought had soared because of the West Coast port strike, narrowed sharply in April. Exports expanded while imports fell. That is good news. Where we go from here is unclear, but the March deficit was so out of whack that it is likely that trade could be largely a nonevent in the second quarter GDP report. When you consider that trade reduced growth in the first quarter by nearly two percentage points, it is clear that the expected economic rebound should be pretty sharp.

MARKETS AND FED POLICY IMPLICATIONS: For an extended period, we had been getting disappointing economic numbers. That is changing, which is exactly what most economists had expected. If the winter, the dock strike and the collapse of petroleum prices were the causes of the slowdown, then the warmer weather, the end of the dock strike and the rise in oil prices should reverse the decline. They have. Friday we get the May employment numbers and it looks like an increase at least as great, if not higher than the 223,000 we saw in April is likely. I think it will be at least 250,000, but I have been too optimistic lately so that is a warning. The unemployment rate is likely to remain at 5.4% or even decline and the number of underemployed should come down as well. Those results would signal a further tightening in the labor market. Fed members have been somewhat dour about the condition of the economy. But the Fed has been behind the curve, when it comes to the economy, for decades and there is no reason to think that has changed. As for the markets, these data show a stronger than perceived economy but with employment Friday coming up, the reaction should be muted.