US ADP muted, not a complete surprise

The modest 169,000 increase in the ADP survey measure of private payroll employment in April is not a complete surprise, since the ADP uses lags of the official non-farm payroll measure to "improve" its methodology. Capital Economics suspects that April's ADP reading was dragged down by March's muted 126,000 gain in non-farm payrolls.

Elsewhere, the 1.9% annualised decline in productivity in the first quarter and the 5.0% annualised increase in unit labour costs obviously look awful. Despite the slump in the first quarter this year, the year-on-year growth rate of productivity actually improved to +0.6% from -0.1%. The annual growth rate of unit labour costs fell back to 1.1%, from 2.6%.

Nevertheless, productivity growth of 0.6% per year is hardly anything to celebrate. Fed officials have been hoping for a rebound in productivity growth for some time, but there is absolutely no evidence of it on the horizon. This is important because, in an environment where productivity is almost stagnant, the Fed needs to be very wary of letting wage growth accelerate. If it is targeting 2% price inflation and productivity growth is 0.6%, then it should be getting very nervous once wage growth exceeds 2.6%. 

By coincidence, the employment cost index showed that the growth rate of private wages and salaries hit 2.7% y/y in the first quarter. In short, the weakness of productivity is another reason to believe that the Fed will begin to raise interest rates in the second half of this year.