posted on 02 June 2016
Written by Steven Hansen
ADP reported non-farm private jobs growth at 156,000. The rolling averages of year-over-year jobs growth rate remains strong but the rate of growth continues in a downtrend (although unchanged this month). But there is no question that this was a weaker jobs report than expected.
ADP changed their methodology starting with their October 2012 report, and ADP's real time estimates are currently worse than the BLS.
Per Mark Zandi, chief economist of Moody's Analytics:
Per Ahu Yildirmaz, VP and head of the ADP Research Institute.
Jobs growth of 150,000 or more is calculated by Econintersect to the minimum jobs growth to support population growth (see caveats below). The graph below shows ADP employment gains by month.
Employment is a rear view indicator, and looking at this ADP data - the overall trend for the year-over-year rate of growth has been flat since mid-2010. (red line in graph below).
ADP Non-Farm Private Employment - Total (blue line) and Year-over-Year Change (red line)
Small and medium sized business historically create most of the new jobs (analysis here) when using the ADP data. A continuing take from the ADP data is that small and medium size business continue to be the employment driver. However, the BLS totally disagrees (see caveats below). The current ADP methodology is showing more jobs growth in big business (and therefore less in small business). Likely they are slowly correcting their data base.
Ratio of ADP Under 500 person Business Growth to Total Business Growth
The relative strength is in the service sector which has driven the jobs growth post Great Recession.
The graph below breaks down employment growth by size of company.
ADP Non-Farm Private Jobs Growth Per Month - Under 50 employees (blue line), under 500 employees (red line), 500 and up employees (orange line)
This month small business created the majority of the jobs.
Finally, this is a breakdown by sector of contribution this month to employment.
Caveats on the Use of ADP Employment Data
For the last two years, ADP's estimates of the final BLS employment numbers have not shown to be accurate. Econintersect does not place much importance on the ADP's numbers since revising their methodology in 2012.
Historically employment is the confirmation that real economic growth is occurring. As background, many economic factors impact jobs growth. How many jobs businesses create in any one month is not directly dependent on these economic factors, but on individual decisions. The impact of all the economic factors is averaged out over many months.
Here is the revised methodology beginning with the October 2012 data:
The graph below shows ADP's monthly change (blue line) versus BLS non-farm private change (red line).
ADP (blue line) versus BLS (red line) - Monthly Jobs Growth Comparison
There is now a known disconnect between BLS and ADP on the breakdown of jobs growth between small, medium and large business - as the graphs below illustrate. Basically the BLS sees large business as the employment driver, while ADP sees small and medium size business as the employment driver. For full details please read: BLS Experiments With New Data Series: Now I Am Confused.
Comparing Jobs Growth Per Month - ADP vs BLS
There is the proverbial question on what is minimal jobs growth each month required to allow for new entrants to the market. Depending on mindset, this answer varies. According to Investopdia, the number is between 100,000 and 150,000. The Wall Street Journal is citing 125K. Mark Zandi said 150K. Econintersect is going with Mark Zandi's number:
Historical Monthly Jobs Growth Comparison if Population was 300 Million
Employment to Population Ratio
Note: The ratio could be fine tuned by adjusting to the ratio of employment to working age population rather than the total population. However, this would not change the big picture that an increase of somewhere around 150,000 (+/-) is needed for the growing population numbers. We have estimated 140k - 160k. The number might possibly be within the range 125k - 175k. Econintersect cannot find reason to support the estimates below 125k.
The question of how changing demographics impact the employment numbers is at the margins of analysis. Econintersect will publish more on this fine tuning going forward, both in-house research and the work of others.
The following graph (not seasonally adjusted non-farm private payroll) shows that most of the employment growth are in the first half of the year, and there is little real growth of employment in the second half of the year. Therefore seasonal adjustment algorithms understate employment growth in the first half of the year, and overstate growth in the second half of the year.
Non-Seasonally Adjusted Employment - Private Sector
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