Written by Steven Hansen
Friday the pundits favorite report to hate – the BLS jobs report – will be issued. ADP reported its numbers today, and for the previous four months, the BLS has reported moderately to significantly lower jobs growth.
- ADP reported July 2012 non-farm private jobs growth at 163,000. The market expected 125K (versus the 163K reported). These numbers are all seasonally adjusted.
- The reported gain from May to June was revised down slightly from the initial estimate of 176,000 to 172,000.
Econintersect believes ADP is the best real time indicator of jobs growth. Jobs growth has been over potential until recently – and now jobs growth is under potential.
This is the second month of jobs growth over 150,000 after two consecutive months of jobs growth under 150,000 [the previous five months were over 150,000]. Jobs growth of 150,000 or more is calculated by Econintersect to the minimum jobs growth to support population growth (see caveats below).
This 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 rate trend is essentially flat since November 2011 (red line in graph below).
ADP Non-Farm Private Employment – Total and Year-over-Year Change
The above graph shows that employment growth is better than last month. The overall trend for the rate of growth had been slightly improving.
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).
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 in 2012. Manufacturing jobs grew this month marginally after two months of contraction.
In our July 2012 economic forecast released in late June, we estimated non-farm payroll growth at 145,000 – all based on historical pressures from an economy running at near potential.
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. The graph below shows ADP’s monthly change (blue line) versus BLS non-farm private change (red line).
ADP versus BLS – 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:
- 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.
Historical Monthly Jobs Growth Comparison if 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.
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