ADP Employment Data Shows Job Growth of 206,000 in November 2011

Editor’s Note: This post was originally published incorrectly using October data.

ADP (the largest payroll provider in the USA) said USA non-farm private payrolls grew 206,000 in November 2011 – a wonderful and surprising jump in employment.

Outplacement agency Challenger, Gray & Christmas, Inc. reported a better layoff picture than last month – and ended a five month string of worsening year-over-year layoffs.  However, on the dark side, layoffs in 2011 have already exceeded the 2010 totals. This positive jobs growth data continues to be anti-recessionary.   This month’s data confirms the downward growth trend of small and medium sized business was broken in September 2011.  Small and medium sized business historically create most of the new jobs (analysis here).  A continuing take from the ADP data is that small and medium size business continue to be the employment driver.

This is the first month since April 2011 that the labor market population growth of 140,000 to 160,00 per month was exceeded (see caveats below).

All the relative strength is in the service sector which has literally provided almost all the jobs growth 2011 to date.

In our November 2011 economic forecast released in late October, we estimated non-farm payroll growth at 125,000, and the consensus estimate was for a jobs growth of between 110,000 and 125,000.

This Friday we will see the BLS November employment report.

Outplacement agency Challenger, Gray & Christmas, Inc. through John A. Challenger, chief executive officer stated:

“Even if Congress finds a way to delay the automatic military spending cuts triggered by the failure of the deficit reduction super committee, there is still immense pressure to cut costs. The drawdowns in Afghanistan and Iraq are likely to result in further personnel reductions.”

“Over the past six months, we definitely have seen a shift away from the heavy government job cuts at the state and local level toward increased job cuts at the federal level. The worst may be yet to come, as cutbacks spread from the military to every other agency in Washington. They will all be targets for cost cutting. The United States Post Office alone could see workforce reductions affecting 200,000 employees.”

According to Challenger, the other sector still at risk for heavy downsizing activity is the financial services industry. Financial firms announced just 1,681 job cuts in November, bringing the year-to-date total for the sector to 56,191. That is up 162 percent from 21,430 financial cuts by this point a year ago.

“Job cuts in the financial sector are still well below the recession high of 260,110, which was the year-end total in 2008. However, even as other sectors begin to enjoy the fruits of the recovery, these firms remain on very thin ice. The ongoing threat from the European financial looms large over Wall Street, while retail banks continue to struggle in the wake of the housing market collapse.”

After the second-ranked financial sector, retail is the next largest jobcutting sector this year, with 48,338 announced layoffs to date. That is up from 33,814 a year ago. These employers announced 2,285 job cuts in November, down from 4,264 the previous month.

“The end of the year is typically when we see much lower retail downsizing, since this is when these businesses are actually hiring in droves, as they bulk up their staffs for the holiday season. We are expecting holiday retail hiring to be about the same as a year ago, when employment in the sector grew by about 627,000. While October employment gains were flat compared to a year ago, we could see increased hiring activity in late November and early December due to stronger-than-expected sales on both Black Friday and Cyber Monday.”

Caveats on the Use of ADP Employment Data

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.

ADP tends to revise slightly their data one month after issuance, and does an annual revision of employment similar to the BLS employment data.

This report was developed and maintained by Macroeconomic Advisers, LLC.

It is a measure of employment derived from an anonymous subset of roughly 500,000 U. S. business clients. During 2010, this subset averaged about 337,000 U.S. business clients and represented over 21 million U.S. employees working in all private industrial sectors.

The data ……. is collected for pay periods that can be interpolated to include the week of the 12th of each month, and processed with statistical methodologies similar to those used by the U.S. Bureau of Labor Statistics to compute employment from its monthly survey of establishments. Due to this processing, this subset is modified to make it indicative of national employment levels; therefore, the resulting employment changes computed for the ADP National Employment Report are not representative of changes in ADP’s total base of U.S. business clients.

Basically this employment index is designed to mimic BLS private non-farm employment – which does not include government employment.  The headline BLS Employment Report includes government employment.

Econintersect believes the simplistic sampling extrapolation technique of ADP yields a far better picture of the employment situation in real time than Bureau of Labor Statistics (BLS) methodology. Although the BLS employment numbers eventually are correct, their data gathering technique does not support the quick release schedule.

Because of the differences in methodology, many pundits ignore the ADP numbers. Although there can be a low correlation in a particular month, the different methodologies tend to balance out, and the correlations are excellent outside of the data turning points. We are now 18 months past the post recession turning point in employment.

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 uses employment / population ratios to determine the number which is between 140,000 and 160,000 – based on historical employment / population ratios.

The following graph (not seasonally adjusted non-farm private payroll) shows that there is little real growth of employment in the second half of the year, and that employment gains are created by seasonal adjustment algorithm.

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