Latest Jobs Data Prompts Upgrade for This Holding
ADP’s latest data shows that the economy is growing but inflation pressure not backing down.
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* ADP’s May job creation findings missed expectations, but they aren’t a sign that the economy is falling apart.
* The upturn in construction hiring is leading us to upgrade United Rentals shares to a One rating.
* Wage gain data for ADP is positive for consumer spending, but it also speaks to sticky inflation.
The stream of May economic data continued on Wednesday with the miss in ADP’s May employment change report that found 152,000 jobs were added during the month, down from the revised 188,000 the month before and below the 175,000-consensus figure.
Categories of large job growth were trade transportation and utilities (55,000), education and health services (46,000), and construction (32,000). The figure for construction adds credence to our view that activity would bounce back from the weather-inspired decline in April found in the recent construction spending report. It also supports our positive stance on One-rated Vulcan Materials VMC and United Rentals URI, which we will upgrade to a One rating from Two.
Taking a step back, the May figure was the lowest since February’s 176,000 figure. The slower pace of May job growth found by ADP will be viewed as a positive for those angling for the Fed to cut interest rates sooner than expected. While it does suggest Friday’s employment report may not be as bullish as the 185,000 consensus for non-farm payrolls, the pace of job creation found by ADP doesn’t signal the economy is about to fall off a cliff. We say this because the average number of jobs created over the August 2023 to January 2024 period was 126,000.
Now, let’s turn to ADP’s May pay insights findings. Wages for job-stayers held steady for the fourth consecutive month at up 5% year over year. Pay for job-changers was up 7.8% compared to year-ago levels, down from 8.0% in April, but up compared to 7.3% to 7.6% in January and February. These findings back the comments found in S&P Global’s flash may PMI that pointed to rising wages and other input costs as well as rising output costs. Those wage gains, while a positive for consumer spending prospects, make it hard to see how companies are not implementing further output price increases.
At 9:45 a.m. ET on Wednesday and then at 10 a.m. ET, S&P Global then ISM published their respective May service PMI reports. Those will round out the picture provided by this morning’s ADP employment change report and recent May manufacturing PMIs. The sum of these will help refine expectations for Friday’s employment report but also what we’re likely to see for May core CPI next week ahead of the Fed’s policy meeting.
Because the coming May service PMI data could ruffle the market’s feathers, we’ll be in a holding pattern with the portfolio until we can digest their findings.
At the time of publication, TheStreet Pro Portfolio was long URI and VMC.
