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ADP: 325,000 Job Gains in December 2011, Challenger 2012 Jobs Forecast Weak

Happy Holidays from ADP – the largest payroll provider in the USA – said USA non-farm private payrolls grew 325,000 in December 2011.  The market expected between 180,000 to 200,000.  This was the largest gain in ADP’s historical records going back to January 2001.

Outplacement agency Challenger, Gray & Christmas, Inc. reported 1.6% lower layoffs in December 2011 than November 2011, but an increase of 31% over December 2010 levels – and capped off a 2011 which saw more layoffs than 2010.  Challenger does not see an improving jobs picture in 2012 which is detailed later in this post.

This positive jobs growth data continues to be anti-recessionary, although not strongly pro-recovery. This month’s data continues to confirm 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 second month since April 2011 that the labor market population growth of 140,000 to 160,000 per month was exceeded (see caveats below).

I am wondering out loud why there is a seasonal pattern in ADP’s seasonally adjusted data.  Note the low points in Augusts and Septembers, and peaks in Decembers.  I am seeing this pattern in a lot of data – and it appears in Econintersect‘s and ECRI’s economic forecasts also.  This has been in the back of my mind for months – but there is not enough data (or cycles) to say this is any more than a coincidence.

All the relative strength is in the service sector which has literally provided almost all the jobs growth in  2011 – but in December 2011, there was some support also from the goods producing sector.

In our December 2011 economic forecast released in late November, we estimated non-farm payroll growth at 100,000.

This Friday we will see the BLS December employment report.

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

“Job cuts in 2011 were dominated by the government and financial sectors. These two alone accounted for 41 percent of all the job cuts announced last year. The 183,064 government job cuts represent a record high for that sector, since we started tracking it in 2002. And, while the financial sector did not come close to its record high, annual cuts for the sector were up 165 percent from 2010.”

“Unfortunately, these sectors are likely to continue to struggle in 2012.  Washington is under immense pressure to cut spending and it looks like every deal to extend tax cuts, raise the debt ceiling and pass the budget will come with measures to cut spending, which can be expected to result in more job cuts.

“Additionally, there are still proposals to make massive cutbacks within the United States Postal Service. While its budget is not taxpayer funded, it has been ravaged by the growth of electronic mail. Involuntary layoffs at the Post Office could total as much as 120,000, according to one plan, with another 120,000 positions lost through attrition.”

“In the financial sector, the economic troubles in Europe will continue to be a cloud hanging over Wall Street in 2012. While temporary fixes have been put in the place for the time being, there is still heavy risk of a collapse, which would ripple quickly through the global banking system. On the home front, many banks are still saddled with millions of foreclosed properties worth a fraction of their original values.”

The government and financial sectors were not the only areas to see increased job cuts. Continued weakness in consumer spending helped contribute to a 32 percent increase in retail job cuts, which totaled 50,946 in 2011, up from 38,751 in 2010. Aerospace and defense contractors felt the fallout from government cutbacks. These employers announced 34,759 job cuts last year, an 82 percent increase from 19,150 the previous year.

“While several other sectors saw increased job cuts, the pace of downsizing in most industries is still well below recession levels. But even as job cuts remain low in most sectors, employers still appear reluctant to add jobs. Net job gains picked up at the end of the year, after dipping in the third second and third quarters, but the pace of job creation is still too slow to make a significant dent in the number of unemployed.”

“Job creation is likely to remain slow and steady in 2012. Washington seems paralyzed when it comes to enacting policies that might spur job growth. Even if they were to pass some legislation that could help, the impact is rarely immediate and is typically smaller than anticipated.

“In the end, there may be little government can do to jumpstart job growth. It really comes down to demand and, right now, consumers and businesses around the world simply are not spending. So, there is little demand and, therefore, no compelling reason to ramp up hiring,”

“In addition to soft demand, two other factors could contribute to slow job growth in 2012: an immobile workforce and a mismatch of skills. Among employers that are hiring, many are complaining that it is difficult to find people with the right skills. This may seem counterintuitive in a labor market with more than 13 million Americans unemployed, but the problem is that many job seekers are unable or unwilling to move to where the jobs are being created.”

“Even if job seekers are willing to relocate, they may not have the skills employers are seeking. The areas hiring now and in 2012 will require specialized knowledge. Information technology, specialty manufacturing, nursing, and commercial construction are areas that are growing, but all of them require specialized skills. Even areas like long-haul trucking, which is in desperate need of drivers, requires a certain level of training that many job seekers are unwilling to pursue. As a result, job creation will be weakened.”

That being said, it would be wrong for job seekers to assume that it is impossible to find a job. The latest available government figures show that employers hired 4,069,000 new workers per month between May and October. That was up from an average of 3,945,000 hires per month in the preceding six-month period. In October alone, employers hired 4,040,000 new workers and there were still 3,267,000 openings at the end of the month.

“It is important for job seekers to realize that every month about two million people quit their jobs. Another 250,000 to 350,000 retire, transfer to new locations, die or suffer a disability that prevents them from returning to work. Hundreds of thousands are terminated for reasons unrelated to costcutting.  In many of these situations, employers are looking for replacements.  Job seekers should be thinking about how to become one of the more than four million people hired every month.”

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 what is done with 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 graph below uses the historical employment-population ratios to show jobs growth per month if the population was 300 million.

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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