Written by Steven Hansen
ADP reported March 2012 non-farm private jobs growth at 209,000. The market expected between 217K and 220K (versus the 209K reported)
There is no question that this level of jobs growth is positive. However, the flip side of the coin is that employment trends are telling us the economy’s rate of expansion has flat-lined. Econintersect believes ADP is the best real time indicator of jobs growth.
This is the fifth month in a row that the labor market population growth of 150,000 per month was exceeded (see caveats below).
There was some backward revision this month. Per ADP:
Estimated gains for previous months were revised higher; the gain from December to January was revised up by 9,000 to 182,000, and the gain from January to February was revised up by 14,000 to 230,000.
This positive jobs growth data continues to be anti-recessionary, although not strongly pro-recovery. Employment is a rear view indicator, and looking at this ADP data – the averaged growth trend is essentially flat after the growth rate peaked in March 2010.
What employment is signaling is that the New Normal economy has settled into a growth rate which is not changing.
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 relative strength is in the service sector which literally provided almost all the jobs growth in 2011.
In our March 2012 economic forecast released in late February, we estimated non-farm payroll growth at 125,000. But as explained in Ben Bernanke and the Puzzle of Employment, our fudge factored estimate would have been a growth of 250K.
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 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.
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:
- If Econintersect used employment / population ratios to determine the number, the exact number seems to be between 140,000 and 160,000. The graph below uses the historical employment-population ratios to show jobs growth per month if the population was 300 million.
- If Econintersect uses employment – population ratios, the correct number would be the number where this ratio improved. Using the graph below, the ratio began to improve starting a little after mid-year. This corresponds to the period where the 12 month rolling average of job gains hit 150,000.
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.