ADP Employment Report and Stock Returns
Posted in Economic Indicators
December 4, 2009
Does the monthly ADP National Employment Report predict U.S. stock market returns? This report “was developed to help meet the need for additional timely and accurate estimates of short-term movements in the national labor market among economists, financial professionals, and government policy-makers. Because ADP pays 1-in-6 private sector employees in the United States every pay period across a broad range of industries, firm sizes, and geographies, it has a unique and significant perspective on the U.S. labor market.” ADP releases the report for each month near the beginning of the following month. Using historical monthly ADP estimates of seasonally adjusted non-farm payrolls for December 2000 through November 2009 (108 months) and contemporaneous monthly S&P 500 Index data, we find that:
The following scatter plot relates next-month return for the S&P 500 Index to this-month change in ADP’s estimate of total non-farm payrolls (ADP employment growth) over the entire sample period. The Pearson correlation for the two series is 0.03, and the R-squared statistic is 0.00, indicating that monthly variation in ADP employment growth explains none of the variation in next-month stock market return.
For the first half of the sample (through mid-2005), the correlation is 0.05. For the second half of the sample (since mid-2005), the correlation is 0.03.
The distribution appears to be much tighter for job growth than for job loss. In case there are material non-linearities in the relationship, we examine quintiles of ADP employment growth.
The next chart summarizes the average next-month returns for the S&P 500 Index by quintile of monthly ADP employment growth over the entire sample period. Although the relationship across quintiles is not completely systematic, there is indication that weak employment growth is worse for stocks than strong employment growth.
Might there be a delay of more than a month in the relationship between stock market return and ADP employment growth?
The final chart summarizes relationships between S&P 500 index monthly return and monthly ADP employment growth for various lead-lag scenarios, ranging from stocks lead ADP employment growth by six months (-6) to ADP employment growth leads stocks by six months (6), for the entire sample. Results suggest that the stock market leads, rather than lags, employment. In other words, stocks have already risen (fallen) before employment rises (falls). Employment does not lead stocks.
In summary, evidence from simple tests indicates that monthly ADP employment growth may be of some (non-linear) use to investors as a standalone indicator for predicting stock market behavior. However, more evidence suggests that stock returns predict changes in employment than vice versa.
