ADP Data Points to Cooling Jobs Market -- What Investors Should Take Away

Key Points

• The job market continues to weaken, according to ADP.

• Cyclical industries appear to be getting hit the hardest.

• The government shutdown could exacerbate the impact.

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Employment is one of the most important factors in the health of the overall economy so it seemed like bad news when ADP reported on Wednesday that private-sector employment was down by 32,000 jobs in September.

The ADP report is especially important this month, because the official unemployment report from the Bureau of Labor Statistics, which was due out on Friday, is expected to be delayed due to the government shutdown.

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What the ADP data shows

According to ADP, small and medium-sized businesses were hit the hardest in September, losing 60,000 jobs, while companies with more than 500 employees added 33,000 jobs.

That's not surprising, as small and medium-sized businesses tend to be more sensitive to macroeconomic factors than large corporations. Among the industries that lost jobs were construction, manufacturing, trade, transportation, and utilities; financial services, professional, and business services; and leisure and hospitality.

Those are primarily cyclical businesses, which could hint at the beginning of a recession. At the very least, it's a clear sign of a weakening economy.

ADP chief economist Nela Richardson said in the report that the number "further validates what we've been seeing in the labor market, that U.S. employers have been cautious with hiring."

What it means for investors

The market seemed to shrug off the news, as stocks were essentially flat around noon ET based on the major indexes, and the report may have been overshadowed by the first day of the government shutdown.

The weak numbers were significantly worse than expectations of 45,000 net new jobs, and August's results were revised down from a gain of 54,000 jobs to a loss of 3,000.

A weak jobs report isn't as straightforward as it might seem. While investors are keen on avoiding a recession, a lackluster labor market will encourage the Federal Reserve to keep cutting interest rates, which favors the stock market. Lower rates encourage business borrowing and expansion, lower the discount rates in financial models like the discounted cash flow, and make bonds less attractive compared to stocks.

It's a delicate balance, but investors seem willing to shrug off one month of modest job losses, given elevated interest rates and a generally low unemployment rate. Additionally, the ADP report doesn't carry the same clout as the one from the BLS.

For now, one month's worth of weak numbers isn't a reason for alarm, but investors should keep a close eye on upcoming labor market reports. If the job market continues to deteriorate, it could impact the stock market sooner than most investors think. Additionally, the government shutdown could mean thousands of layoffs in the public sector, adding to woes in the labor market.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.