ADP and ISM Manufacturing Fail

Published by Filipe R. Costa on Wed, 01/06/2011 - 15:52

Negative news in the US keep going. The ADP report showed that companies added just 38,000 jobs in May, down from 177,000 in April and the smallest increase since September 2010. Bloomberg News Survey was estimating 175,000 jobs. Actual figures showed a very weak number that may be interpreted as a signal that the job market is deteriorating.

The rise in food and gas prices is taken a larger part of the household income and deteriorating living conditions. The difficulties in the job market don't help families that are losing confidence in the economy. The large dependence that the US economy has from the consumer, may lead to slower growth rates. This is already the case for the 1Q, with GDP only growing at 1.8%. Economists are saying that the second quarter is not expected to be any better. Yesterday we saw a major decline in CB Consumer Confidence. A continuing decline in confidence will impact GDP growth negatively.

Although the most important job report has still to come next Friday - the non-farm payrolls - recent reports along with the ADP figure today are pointing to a much weaker number than expected next Friday. Economists at Credit Suisse revised their first estimate of 185,000 to 120,000 after assisting to the ADP report. It is true that the ADP is poor in predicting non-farm payrolls but the ADP number is not alone this time. Recent jobless claims and economic activity levels like the ISM reported today are all pointing for a weaker job market.

Today the Institute for Supply Management reported the ISM manufacturing Index. The composite showed a decrease from 60.4 to 53.5, and is below the consensus of 57.5. The number is very weak. Although a reading above 50 shows expansion, the pace of the expansion is slowing.

On the positive side, construction spending shows an increase of 0.4%, above the 0.1% consensus estimate. This is not really good news because last month the indicator was held at just 0.1% significantly revised from 1.4%. This way the increase reported is not sufficiently high to speak about a rebound in the sector.

We have been assisting to a round of very weak data. The US equity market managed to go up, but the ADP report today along with the ISM Index may put the market in a downtrend again, especially if there is a confirmation of a poor non-farm payrolls number next Friday.

Spread betters should be carefully and take the opportunity to make some profits. The Dow may be under some pressure and a risk-averse sentiment may return to the market. The effect on currencies is mixed. By one side, weaker than expected US data press the US dollar down, but by other side the risk-aversion attitude and the decrease in equities may press it higher. The best currency bet is in USD/JPY that tends to decrease in these situations.