Strong August Job Creation Boosts Analyst, Investor Confidence In US Economy

Data released Thursday in the ADP National Employment Report showed that the private sector created 201,000 jobs in August, more than the approximately 140,000 various analysts expect and the biggest gain for employment in five months.

Meanwhile, a report from Challenger, Gray & Christmas Inc. stated that job cuts in August dropped to 32,239 -- the lowest numbers for layoffs in 20 months.  

Together, the two reports sparked a re-evaluation among some leading analysts of their outlook for the U.S. economy's job creating prospects.

"The 201,000 increase in the US ADP private sector employment survey in August was the biggest gain in five months and suggests that our forecast that official non-farm payroll employment rose by around 100,000 in August may be too pessimistic," John Higgins of Capital Economics said in a note. 

Joseph A. Lavorgna, chief U.S. economist for Deutsche Bank, said the surprise ADP number should cause an upward revision in forecasts for Friday's non-farm payroll report, but he is not raising his forecast because it is already above consensus.

"At the margin, ADP and (today's) non-manufacturing ISM employment impart some upside risk to our August payrolls (forecast). However, we are already above consensus (at 127,000), and jobless claims are little changed over the relevant period," he said in a note. "

Another sign that the surprisingly strong ADP changed some minds emerged in the bond market. The price of U.S. Treasuries, a safe-haven security whose price reflects the investment community's outlook for the broader economy, fell shortly after the report was issued. The price of the benchmark 10-year Treasury note traded down 17/32 to yield 1.65 percent, a gain from the previous day's yield of 1.55 percent.

Bond prices move inversely from yields so a rise in yields, as well as the accompanying fall in prices, indicates weaker investor interest in safety and a more optimistic outlook.

Not all economists viewed the ADP report as an occasion to brighten their outlook.

"Overall, we view this report as suggesting that the modest improvement in labor market conditions that began in July has held through August, but further momentum has been lacking," Michael Gapen of Barclays said in a note.

"For the August employment report, scheduled for release (Friday), we continue to look for headline nonfarm payrolls to rise 150,000 and for private payrolls to rise 160,000. We expect the unemployment rate will decline 0.1 percent to 8.2 percent. Our forecast is consistent with the readings on jobless claims, which suggest conditions in labor markets have improved relative to those seen in Q2. As a result, we look for the improvement in the July payroll numbers to continue."

Aspen Gorry, an economist at the American Enterprise Institute, was also unmoved by the ADP numbers.

"I don't think this shows that the job market is actually improving just because the ADP numbers typically differs fairly substantially from jobs report numbers," he said. "It's a positive signal to get more private sector jobs -- but it's not going to drastically change the forecast."

Despite the resistance to revising forecasts upwardly, some economists appeared closer to making such a move, especially if Friday's employment report is also strong, or at least ease worries about the economy.

"The gain in private employment in August is strong enough to suggest that the national unemployment rate may have declined," Joel Prakken, chairman of Macroeconomic Advisers LLC said. "Today's estimate, if matched by a similar reading on employment from the Bureau of Labor Statistics on Friday, will alleviate concerns that the economy has slipped into a downturn."  

Moran Zhang and Eleazar David Melendez contributed to this story.