Weak GDP, But Strong ADP Keeps 25bp on the Table for the Fed

January 30, 2008

What did this morning’s US numbers tell us?

We could see a blowout number in January job growth. ADP reported that 130k new jobs were added to US payrolls last month which dovetails well into the surprisingly low level of jobless claims that we have seen in recent weeks. The four week moving average of claims is now at a 3 month low which indicates that non-farm payrolls at bare minimum, more than 18k jobs were created in January . On top of that, the weather was unseasonably warm. With the strong level of ADP and the low level of jobless claims, non-farm payrolls could be as high as 100k.

The only monkey in the wretch is the manufacturing and construction sector which will continue to cut jobs. More layoffs were announced in the month of January at companies like Yahoo, Sprint, Lehman Brothers and General Motors.

What about GDP?

The US economy grew by 0.6 percent in the fourth quarter, which was half of the amount that the market had originally expected. Personal consumption also slowed from 2.8 percent to 2.0 percent while core price growth accelerated. These numbers confirm that even though consumer spending is slow, inflation remains a problem.

The bottom line is despite the weak job growth, the better ADP number and yesterday’s stronger durable goods data increases the chance that the Fed will cut by only 25bp. I still do not think this will be the case, but I suggest lightening up your positions for those of you banking on a 50bp cut.

Posted in GDP, ADP, non-farm payrolls, US Economy, US Dollar