The Federal Reserve Has Ways of Tracking Labor Markets Without ADP Data

he eagle statue sits on the Marriner S. Eccles building of the Federal Reserve Board in Washington, D.C. (Alex Wong / Getty Images)

The Fed still has a range of ways to track the labor market during the government shutdown after losing access to key ADP data.

State level unemployment claims as well as private data sources could give the central bank clues about the labor market.

The government shutdown has stopped production of the government’s monthly employment report, the main way the Federal Reserve tracks the health of labor markets. Fed watchers assumed the central bank would lean heavily on data from ADP, a payroll-processing company, to fill the breach. Earlier today, The Wall Street Journal reported that the Fed had lost access to a key data set on employment from ADP before the shutdown.

The data disruption comes at a delicate moment for monetary policy. The Fed cut interest rates by a quarter percentage point in September and markets widely expect a similar reduction when policymakers meet Oct. 28-29.

ADP halted its data sharing with the Fed shortly after Governor Christopher Waller gave a speech in late August that highlighted the central bank’s use of the information, according to the Journal.

In that speech, Waller noted that preliminary figures from ADP showed employment weakening into the summer before the company had released its public report for that period. The revelation may have upset ADP, even though the Fed’s use of its data had been documented publicly for years, including in research papers, Fed meeting minutes, and a 2019 speech by Chair Jerome Powell.

ADP didn’t respond to requests for comment and the Fed declined to comment for this article.

The timing creates a situation where the Fed may cut rates without seeing the kind of comprehensive government employment data it normally relies on. Powell acknowledged the difficulty at a recent economics conference, saying private data works best as a backup to official government statistics, which he called “the gold standard.” When forced to use private sources as the main course rather than a side dish, he suggested, they become less reliable.

Still, Powell pointed to several decent alternatives. State-level unemployment claims can be added together to create a national picture. The Chicago Fed recently launched a labor market forecasting tool, though that also depends on some delayed government data. Other private companies track job postings, credit-card spending, and online prices to gauge economic activity. Carlyle and Ravelio have recently released jobs reports for September, and regional Fed banks collect both anecdotal and survey data of their own.

Vincent Reinhart, chief economist at BNY Investments, said in a note Wednesday that the Fed might actually be more likely to ease when data is scarce, since the absence of clear evidence makes policymakers cautious about holding rates too high. Economists at Citi expect the Fed to cut rates by another quarter point in October and again in December, with additional cuts possible into early next year if the job market continues softening.

The bigger challenge may come at the December meeting, when delayed government reports could suddenly arrive in quick succession if the shutdown ends. The September jobs report could be released within days if the government reopens in early November. The October report might follow soon after, though data collection problems during the shutdown could distort those figures. The November report would then land on its regular early December schedule. That would mean three major employment reports, any of which could shift the Fed’s outlook, would be compressed into roughly four weeks.

This flood of information would force policymakers to quickly resolve a tension that Waller identified in a recent speech: Data have shown solid economic growth alongside weakness in hiring. The question is whether job growth will accelerate to match the economy’s momentum, or whether business activity will slow to match the cooling labor market. Most analysts expect continued softening in employment.

The loss of ADP data adds one more complication to an already difficult environment, but the Fed’s ability to tap multiple information sources, imperfect as they may be, provides some cushion. The central bank has weathered data disruptions before. The challenge this time is that the disruption coincides with a genuine debate about the economy’s direction, making every scrap of information more valuable than usual. ​​​​​​​​​​​​​​​​

Write to Nicole Goodkind at nicole.goodkind@barrons.com