ADP surprise | FT Alphaville

ADP surprise


Private-sector employment increased by 297,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from October to November was revised down but only slightly, from the previously reported increase of 93,000 to an increase of 92,000.

This month’s ADP National Employment Report suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate. After a mid-year pause, employment seems to have accelerated as indicated by September’s employment gain of 29,000, October’s gain of 79,000, November’s gain of 92,000 and December’s gain of 297,000. Strength was also evident within all major industries and every size business tracked in the ADP Report.

According to the ADP Report, employment in the service-providing sector rose by 270,000 in December, the eleventh consecutive monthly gain and the largest monthly increase in the history of the report. Employment in the goods-producing sector rose 27,000, the second consecutive monthly gain and the largest since February 2006. Manufacturing employment rose 23,000, also the second consecutive monthly gain.

Employment among large businesses, defined as those with 500 or more workers, increased by 36,000 while employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 144,000. Employment among small-size businesses, defined as those with fewer than 50 workers, increased by 117,000.*

Construction employment was unchanged in December, ending continuous monthly declines since June 2007. The decline in Construction employment, since its peak in January 2007, is 2,306,000. Employment in the financial services sector declined 8,000 in December.

Something to cheer, then, though last month’s favourable ADP report was immediately followed by that atrocious payroll report. But in its immediate aftermath, we started seeing signs that the employment situation was better than it suggested.

In other words, the ADP report might be closer to reflecting the true state of the labour market.

One of the continuing worries for the US economy has been that companies have continued to sit on their mountainous cash piles. But as the WSJ reported on Monday, some companies are signaling that they plan to start deploying more of their hauls to invest in labour. Perhaps the process has finally begun.

On a cautious note, it’s worth emphasising that this report doesn’t include government jobs, which declined last year and, with  states increasingly cash-strapped, are likely to continue declining.

Here’s the immediate reaction to the news in US Treasuries, starting with the 10-year:

And the 30:

UPDATE: Strategists at Nomura have just sent out a short note urging a bit of skepticism, noting the methodology used in calculating the report and the history of surprises in December. Worth considering:

The ADP forecast for December nonfarm payroll employment was 297,000, nearly triple the consensus forecast (Consensus: 100,000). We believe the large miss primarily reflects seasonal adjustment distortions, and the company that compiles the data, Macroeconomic Advisors, said as much in a formal statement after the report: “ADP’s National Employment Report estimates a gain of 297 thousand for private payroll employment in December.  Can that be right?  There are reasons to be suspicious that are related to normal problems with seasonal adjustment”. Macroeconomic Advisors still had a positive take on the report, but this seemed to be informed by an overall view of labor market conditions, rather than today’s ADP numbers.

Unlike the BLS count of employment, which measures the number of paid jobs in a certain period, the ADP series measures the number of people in firms’ payroll systems at any given time. Companies often keep all employees on the payroll all year – even if they are not being paid – for tax purposes. These workers are then purged from the payroll system in December. The ADP report has historically had problems seasonally adjusting these December figures. In fact, all three of the largest ADP “surprises” (reported growth relative to consensus forecasts) have occurred in Decembers.

Given these known distortions and ADP’s spotty track record in predicting the BLS count of private employment, we are leaving our forecasts for Friday unchanged. We expect growth in nonfarm payrolls of 165,000 and an unemployment rate of 9.6%.

Related links:
US unemployment, qualified – FT Alphaville
Payrolls breakdown … bletch – FT Alphaville