The disappointment in the ADP data was that January 2012 jobs growth of 170,000 was less than the 190,000 jobs growth of January 2011. After the blowout data from ADP in December, the market was expecting 200,000 to 250,000. Note that ADP lowered the December estimate from 325,000 to 292,000.
Does this dash expectations that the economy was improving? The Econintersect economic forecasts indicated the jobs creation pressures were lower in January 2012 than January 2011. Jobs and economic improvements are not linear or in sync.
This is the third month in a row that the labor market population growth of 140,000 to 160,000 per month was exceeded (see caveats below).
This positive jobs growth data continues to be anti-recessionary, although not strongly pro-recovery. 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.
I am continuing to wonder why there is a seasonal pattern in ADP’s seasonally adjusted data. Note the low points in the months of August and September, and peaks in Decembers. I am seeing this pattern in a lot of data – and it appears in Econintersect and ECRI economic forecasts also. My initial thought is that this is a new normal seasonality, however it could also be economic effects with only circumstantial appearance of seasonality which are causing the economy to pulse.
The relative strength is in the service sector which has literally provided almost all the jobs growth in 2011.
In our January 2012 economic forecast released in late December, we estimated non-farm payroll growth at 90,000.
This Friday we will see the BLS January employment report.
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.
On March 7, 2012, Automatic Data Processing, Inc., in conjunction with Macroeconomic Advisers, LLC, will publish annual revisions of the estimates of employment shown in the ADP National Employment Report. These revisions will reflect:
- Updated regression estimates used to adjust for historical differences in the variances of the monthly growth rates of employment reported by the Bureau of Labor Statistics and computed from ADP data;
- Updated estimates of the differences in the historical averages of the growth rates of employment reported by the Bureau of Labor Statistics and computed from ADP data;
- Updated estimates of historical seasonal factors;
- The reference month for establishing the levels of employment shown in the ADP National Employment Report will be advanced from March 2010 to March 2011; and
- There are no revisions to the methodology of computing the estimates of employment shown in the ADP National Employment Report.
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 22 months past the post recession turning point in employment. Based on current estimates, BLS non-farm private jobs growth in 2011 was 1,920,000 while ADP was 1,925,000. The difference is insignificant.
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.