By Martin Baccardax

Economists are a bit like NFL football coaches. They don't like distractions, and they don't like anything getting in the way of their gameday preparations.

Thursday's nonfarm payroll report is the financial-market equivalent of an NFL playoff. It will be a key indicator of how well the labor market was holding up heading into the summer. That makes it a barometer of the outlook for growth in gross domestic product, consumer spending, and by extension, Federal Reserve interest rates.

That has economists looking at all kinds of data, prepping in great detail for the 8:30 a.m. Eastern time whistle on Thursday. The report is usually on the first Friday of the month, but it will arrive a day earlier owing to the July 4 holiday.

This time, economists are facing a major distraction. The payroll processing group ADP, which publishes its monthly national employment report just prior to the Labor Department's official figures, said private-sector employment fell for the first time in two years last month.

Overall payrolls slumped 33,000 in June, the group said. The consensus call on Wall Street was for a gain of 95,000 jobs.

Normally, those same economists would quickly dismiss the ADP reading because it focuses only on private-sector payrolls and is based on a data sample that is much smaller than that of the Bureau of Labor Statistics. But now, it seems that expectations on Wall Street -- the consensus forecast is that 115,000 jobs were added -- are changing.

"The ADP payrolls number isn't always a reliable predictor of the government's monthly jobs data, but in the current environment, today's downside surprise could raise more eyebrows than usual," said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.

"Some tariff-related slowdown in the labor market is expected. The question is how significant it will be, and how the markets will respond, " he said. "This month could begin to provide some answers."

A slowing trend in job growth, uncertainty about tariffs, and a nervous consumer have investors looking at the ADP data a bit more closely.

Jeffrey Roach, chief economist at LPL Financial, says that while ADP's forecasting value is "minimal on a monthly basis...it's still helpful in determining long-term trends." He is taking the June ADP report seriously, arguing that it has "increased the odds of a downside surprise in Thursday's nonfarm payroll release."

Chris Zaccarelli, chief investment officer at Northlight Asset Management, is paying closer attention as well. "The surprising miss on the ADP report calls into question what we will see in the jobs report tomorrow," he said.

" The stock market is back to all-time highs, the economy continues to expand and the job market has been holding up," he said. "But the economy is slowing its pace of expansion and it's possible that we've reached full employment and the only way forward is lower."

Pantheon Macroeconomics' senior U.S. economist, Oliver Allen, however, isn't a believer. He calls the ADP data "more noise than signal" when it comes to assessing the job market and suggests investors ignore it.

"ADP's forecast error has averaged 84,000, and has been as big as 348,000 since its methodology was overhauled in August 2022," he said. "That's a bigger average error than for the consensus forecast of about 50,000."

Goldman Sachs economists left their June nonfarm payroll forecast at a below-consensus 85,000, saying "we do not place much weight on the ADP miss because of ADP's limited correlation with BLS private payrolls over the last few years."

ADP has argued in the past that its report isn't meant to match the BLS data. It changed its methodology in 2022, in partnership with the Stanford Digital Economy Lab, in order to deliver what it called "a richer labor market analysis."

Over the past 2 1/2 years, ADP figures have been moving closer to matching the headline hiring figure in the monthly BLS reading.

In 2023, the monthly difference averaged 103,00. So far this year through May, it is just under 64,000, according to an analysis by Dow Jones Market Data.

Bill Adams, chief economist for Comerica Bank in Dallas, suggests that while ADP's data "doesn't always line up with the BLS jobs report," neither assessment is perfect in a labor market that employs nearly 160 million people.

"Both are fuzzy reads of the exact state of the economy, which can be inferred through monthly statistics but not measured precisely in real time," he said.

"Tariff hikes and policy uncertainty gave employers reason to be cautious toward hiring in the second quarter," he added. "The Israel-Iran war was a further reason to put hiring plans on hold in June."

If that turns out to be true, the ADP data might have caught it first. That could mean the monthly report is more a necessity than a distraction.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 02, 2025 14:45 ET (18:45 GMT)

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