Private sector payrolls increased 218,000 in July, according to this morning’s ADP Employment Report. The rise fell short of most expectations and well below June’s 281,000 surge, but the latest advance marks the fourth straight monthly 200,000-plus gain. While some analysts will obsess over the deceleration in the monthly comparison, it’s worth pointing out that the year-over-year change in the ADP jobs data inched higher to a 2.15% increase—the fastest annual pace since August 2012. In other words, the broad trend for payrolls continues to hold to a moderately strong rate of growth–with a slight bias to the upside in the latest numbers.
“The July employment gain was softer than June, but remains consistent with a steadily improving job market,” said Mark Zandi, chief economist of Moody’s Analytics, in the accompanying press release for today’s ADP release. “At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016.”
Today’s news on payrolls was followed by a surprisingly strong GDP report for the second quarter. The US economy rebounded to a 4.0% growth rate in the second quarter (seasonally adjusted annual rate), according to the Bureau of Economic Analysis reports in its preliminary estimate for the April-through-June period. The increase represents a sharp reversal from Q1’s 2.1% slump, which was revised up in today’s release from the previously reported 2.9% decline.
A key factor in the stronger Q2 GDP report is the return of growth in consumer spending. Personal consumption expenditures (representing nearly 70% of economic activity according to BEA’s GDP data) increased 2.5% in Q2, or more than double Q1’s pace. An even more dramatic turnaround unfolded in gross private domestic investment (GPDI), which reflects spending on machinery, residential infrastructure, changes in inventory, and other items. Indeed, GPDI jumped 17% in Q2 vs. Q1’s 6.9% retreat.
In short, the latest macro numbers for the US send a bullish signal. The question is whether the rear-view mirror is threatened by what could be a brewing storm from rising geopolitical risk tied to the tighter sanctions on Russia that the US and Europe announced yesterday? As I noted earlier today, there’s an increased appetite lately for the safe haven of government bonds, a preference that’s pushed benchmark yields lower, in some cases to record lows in Europe.
But the Treasury market is inclined to focus on the positives in early New York trading today. At the moment (09:35am Eastern) the benchmark 10-year yield has jumped above 2.50%–the high point so far for the week. The strong macro numbers have convinced the crowd this morning that US growth will trump any fallout from the perpetually weak European economy and the potential for blowback from the ongoing Russia-Ukraine crisis. “The economy is looking pretty darned good,” Stuart Hoffman, chief economist at PNC Financial Services Group, tells Bloomberg. “The momentum for the second half is solid. The labor market is driving this growth, which means companies are looking for workers.”
The obvious implication: positive run of US data will persist. That theory, which isn’t unreasonable, will be tested again in tomorrow’s weekly update on jobless claims and a batch of reports on Friday via the Labor Department’s estimate of July payrolls and the June update on personal income and spending. For now, macro momentum remains on the side of the bulls. Nothing less is required to keep the crowd from focusing on the smoldering risks in Europe and the crisis to its east.