October ADP Employment Report Surprises On The Upside, Indicating Strong NFP On Friday

• The ADP employment report saw 229K new jobs added in the US economy in October, well above 1.89K expected by the market.
• October 2018 ADP employment report saw the best job creation since October 2014.
• Given the historical correlation, a strong reading in private ADP employment report indicates upside surprise in the government’s report on Friday.

The US private jobs increased 227K in October, with 38K in the goods-producing sector and 188K in services providing sector, the ADP employment report showed on Wednesday. September reading in ADP employment was revised to 218K from originally reported 230K. The  October ADP employment was still the best October since 2014 when 233K jobs were added in the US economy.

The long-term simple correlation of the ADP employment report with the non-far payroll total number reported by the Bureau of Labor 78 percent based on monthly percentage change in total nonfarm private employment since January 2010. The average forecast error is 10.3K while the mean absolute error is 31.45K.

Given the market forecast for Friday’s non-farm payroll of 190K and the current ADP employment figure of 227K, even if the deviation of the ADP from the government’s non-farm payroll hits the absolute error of 31.45K on the downside, the actual number will be 196.5K, so exceeding the current market estimates.

On the other hand, if the deviation of the ADP from the government’s non-farm payroll hits the absolute error of 31.45K on the upside, the actual number will be 258.5K, exceeding the current market estimates and marking the highest job creation since this February’s 313K.

The expectations of the upside surprise in Friday’s non-farm payroll report from the US Bureau of Labor are emphasized by the fact, that in September the ADP employment report surprised on the upside rising to 230K originally reported, while government’s non-farm payroll reached only 134K, completely diverging from ADP report. While historical correlation is 78 percent, such divergence is left for 22 percent on times in a year a that is about twice in a year.

"The US job market continues hot. Private payrolls are not the whole story for NFP but they are the largest and most productive part. A strong lead for Friday's BLS report," Joseph Trevisani, a senior market analyst at FXStreet commented on Wednesday's ADP report.

ADP employment in sectors