INSTANT VIEW: Private employers add jobs; productivity up

NEW YORK (Reuters) - U.S. private-sector employers unexpectedly added 40,000 jobs in May, according to a private report by ADP Employer Services released on Wednesday.

U.S. productivity grew at a slightly faster-than-expected 2.6 percent annual rate during the first quarter on stronger output than was initially gauged, government data on Wednesday showed.

KEY POINTS:

ADP * In April, the private sector added 13,000 jobs. April's addition was revised up from the previously reported 10,000. * Economists' median expectation was for a drop of 30,000 jobs in May, according to a Reuters poll.

PRODUCTIVITY * Economists polled by Reuters had expected non-farm productivity, which measures the hourly output per worker, to increase at a 2.5 percent pace, compared with a previously estimated 2.2 percent rate. * Compared with the first quarter of 2007, non-farm productivity was up 3.3 percent, the quickest pace in nearly four years. * The Labor Department said first quarter output was revised higher to show a 0.7 percent gain at an annual rate, from 0.4 percent previously reported. Worker hours shrank 1.8 percent as businesses cut back on labor inputs to shield profits amid a cooling U.S. economy. It was the third straight quarterly decline in hours. * Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose by 2.2 percent at an annual pace, faster than the 2.0 percent rate forecast by analysts.

COMMENTS:

SAL GUATIERI, SENIOR ECONOMIST, NESBITT BURNS, TORONTO

PRODUCTIVITY: "Given that the size of the revision is fairly modest I don't think there would be must response in either equities or bond markets. But overall the numbers are supportive of the equity markets. U.S. productivity remains healthy as companies strive to efficiency while laying off workers.

"It's a sign that U.S. companies are striving to remain competitive. They've already received a good-sized boost from the weak U.S. dollar, but at the same time they're not getting lazy. They're maintaining productivity improvements, some of that is coming on the back of layoffs, but at the same time companies are able to meet demand with few workers.

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR &

ASSOCIATES, TORONTO:

ADP: "My bottom line would be I think the economy is weak but I still think that it's more like a 1 to 1.5 percent growth type economy. To me it suggests more like a tepid economy rather than an economy in recession."

PRODUCTIVITY: "The productivity numbers are within expectations. It's not dropping further which is a plus for operating margins because operating margins have dropped already. I always thought the earnings numbers would bottom in the middle to second half of 2008 for the S&P 500 and I'm staying with that feel. These productivity numbers are supportive of earnings bottoming out in the second half of this year. Basically companies are holding their own on productivity."

IAN SHEPHERDSON, CHIEF U.S. ECONOMIST, HIGH FREQUENCY

ECONOMICS, VALHALLA, NEW YORK:

ADP: "The ADP survey showed ... the biggest gain since January.

"This is something of a surprise and, other things equal, it increases the chance that Friday's official payroll number will beat the current consensus. But there are no guarantees: In January, when ADP employment rose 118,000, official payrolls fell by 79,000. ADP has overstated official payrolls for the last nine months straight, with an average error of 71,000. So much for the numerology, what about the economics? Most of the labor market indicators we follow are consistent with clear declines in payrolls, so we remain of the view that the trend will be downwards for the foreseeable future. But with such volatile data, in any given month, anything can happen."

KEVIN LOGAN, SENIOR U.S. ECONOMIST, DRESDNER KLEINWORT, NEW

YORK:

ADP: "ADP has been consistently overestimating the change in private employment for the last six months. They have been high every month for six months -- the average miss is about 88,000, so we have to be really wary in how to interpret this number. Although it has come in positive, they have been positive when the official data has been negative, so I would not use this as an accurate guide to what we are going to see on Friday. However, according to their data -- and they do have a very sensitive data base -- payroll employment is growing a bit. It is not a very strong number, so I would say it is still reflective of a slowdown in the growth of employment at a minimum and perhaps, if we make an adjustment to it, suggests that we will still see a decline in the official data when it comes out on Friday."

CARY LEAHEY, ECONOMIST AND MANAGING DIRECTOR, DECISION

ECONOMICS, NEW YORK:

ADP: "ADP has been inaccurate of late, overpredicting payrolls. That said, the increase of 40,000 jobs in the report will let the market conclude that the May payroll figure due this Friday will be flattish to slightly down, which would be stronger than expected and that explains this mild selloff in the bond market.

"The ADP report made such a huge error in January that people have put it more to the back burner but since the market rallied so much yesterday, it was caught offsides by this stronger-than-expected report. The market's reaction is more a function of how much bonds rallied yesterday than of how much stock they put into the ADP report. But it's still another piece of evidence that the recession could be relatively mild and over in six months."

STEVEN BUTLER, DIRECTOR OF FX TRADING, SCOTIA CAPITAL,

TORONTO:

ADP: "It's such a lottery number, but I think you have to give it a bit of weighting today because it was a surprise and it caught the market a bit off guard. Certainly, it's going to give the dollar a bit of a boost. But I'm not sure we'll have much follow-through, as we've already had a big week. It's not often you see the Fed chairman step into the shoes of the Treasury secretary, as Mr. Bernanke did yesterday.. But it may be tough to sustain gains ahead of tomorrow's ECB meeting and the nonfarm payrolls report on Friday."

MARKET REACTION: * BONDS: U.S. Treasury debt prices flat to slightly higher * CURRENCIES: U.S. dollar down slightly vs yen and euro * STOCKS: U.S. equity indexes remain lower * RATE FUTURES: U.S. short-term interest rate futures little changed, pricing in a 4 percent probability of a 25 basis point rate cut at the Fed's June meeting, compared with a 4 percent probability late Tuesday