Happy New Year from ADP – Record Employment Gain in December 2010

December 2010 private sector non-farm payrolls rose 297,000 – the largest increase in the ten year history of ADP reporting.  The headlines:

Private-sector employment increased by 297,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from October to November was revised down but only slightly, from the previously reported increase of 93,000 to an increase of 92,000.

This month’s ADP National Employment Report suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate. After a mid-year pause, employment seems to have accelerated as indicated by September’s employment gain of 29,000, October’s gain of 79,000, November’s gain of 92,000 and December’s gain of 297,000. Strength was also evident within all major industries and every size business tracked in the ADP Report.

According to the ADP Report, employment in the service-providing sector rose by 270,000 in December, the eleventh consecutive monthly gain and the largest monthly increase in the history of the report. Employment in the goods-producing sector rose 27,000, the second consecutive monthly gain and the largest since February 2006. Manufacturing employment rose 23,000, also the second consecutive monthly gain.
Employment among large businesses, defined as those with 500 or more workers, increased by 36,000 while employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 144,000. Employment among small-size businesses, defined as those with fewer than 50 workers, increased by 117,000.*

Construction employment was unchanged in December, ending continuous monthly declines since June 2007. The decline in Construction employment, since its peak in January 2007, is 2,306,000. Employment in the financial services sector declined 8,000 in December.

Clearly, the underlying economy is gaining strength.  The gains are concentrated in the small to medium sized service sector (business with under 500 employees) – which is historically the economic engine.

Last month it was pointed out that historically ADP employment dropped in December.  2010 broke this mold big time.  Econintersect believes the underlying economy is trying to gain strength for the second time since the end of the recession – but it stalled after May 2010.

ADP’s release is issued coincident with the December 2010 layoff press release from global outplacement firm Challenger, Gray & Christmas, Inc.   The importance of the Challenger release is that it offers a picture into the corporate world showing whether layoffs are ongoing.  Their headline:

After reaching a seven-year high in 2009, downsizing activity in 2010 fell to its lowest level since 1997, as employers announced plans to eliminate 529,973 positions.  The year came to a close with the lowest monthly job-cut total since 2000.

Planned layoffs totaled 32,004 in December, down 34 percent from 48,711 in November, according to the 2010 year-end job-cut report released Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc.  December job cuts were 29 percent lower than the same month a year ago when 45,094 cuts were announced.

December surpassed August (34,768) as the lowest job-cut month of the year.  It was the lowest monthly total since June 2000 when employers cut 17,241 jobs.

The December decline marked a fitting end to 2010.  The 529,973 job cuts announced during the year were 59 percent fewer than the 1,288,030 layoffs recorded in 2009, the largest downsizing year since 2002 (1,466,823).  The 2010 total was the lowest since 434,350 job cuts were announced in 1997.

“The downsizing phase of the recession really came to an end in 2009.  Job cutting fell dramatically in the second half of that year.  The pace of downsizing continued to slow in 2010 to levels we have not seen since before the 2001 recession,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

Nearly every major industry category saw job cuts decline in 2010; some by more than 90 percent.   Layoffs in the automotive sector fell 91 percent from an industry-leading 174,192 job cuts in 2009 to 16,001 in 2010.  Industrial goods manufacturers saw job cuts plummet 79 percent from 125,423 to 26,487.  Retail employers, which had 98,807 job cuts a year ago, announced 38,751 layoffs in 2010; a 61 percent drop.

Even government and non-profit, the largest job-cutting sector of the year, experienced a 17 percent drop in layoffs.  However, this struggling sector was still forced to eliminate 142,255 positions in 2010.  That was 165 percent more than the second-ranked pharmaceutical industry, which announced 53,636 layoffs in 2010.

“Unfortunately, the government sector is likely to see heavy job cuts again in 2011 as the budget shortfalls that existed in 2010 continue into the new year.  In fact, the sector could see an increase in job cuts in 2011 as state and local agencies, which saw the heaviest downsizing last year, are joined by federal agencies under increasing pressure from a Congress determined to cut spending,” noted Challenger.

“Despite the decline in job cuts in 2010, it was still a lackluster year for the overall job market.  The private sector did experience 11 consecutive months of net job gains, as of November, but the gains were relatively small; not nearly enough to make a dent in unemployment, which stood at 9.8 percent heading into the final month of 2010,” said Challenger.

“Unemployment will probably remain high throughout 2011.  In fact, it could venture north of 10.0 percent again before the end of the year.  Hiring in the private sector is expected to once again be slow and steady; too slow to offset losses in the government sector.  However, hiring is likely to be significant enough to entice individuals who abandoned their job searches in 2009 and 2010 to re-enter the labor pool.”

According to Challenger, re-engaged job seekers, who were not counted among the unemployed while not searching, coupled with newly laid-off government workers, could put upward pressure on the unemployment rate.

“Further job-search competition will come from people who are currently employed.  They may have already seen some of their colleagues move to greener pastures, so they will be even more tempted to test the waters in 2011.  Companies that are not quite ready to accelerate hiring will be required to focus more energy on retaining existing employees,” said Challenger.

For many who were able to find employment in December, this economic expansion is welcome.  It may offer hope that 2011 will be better than Econintersect believes.  Challenger’s statement about the rise in the unemployment rate is bookkeeping.  As long as real economic growth can continue, the economy can work its way out the deep hole.

Later this week, we will again be subjected to the wacky BLS data.  There is no way to really predict their report, but even though Econintersect believes their numbers could match ADP’s – they are predicted by others to be in the 225,000 range.  And there is reasoning that would cause Econintersect think the 225,000, or even less, could be the BLS number.  We explain as follows:

The ADP and BLS employment reports have been diverging in magnitude over the past 13  months, as shown in the following graph.

Annotations added by John B. Lounsbury 1/5/2011.

A similar amount of divergence occurred at the last peak, so divergence at turning points might be a pattern.  This can not be proven with a sample of four and the ADP data only goes back to 2000.

The previous divergences were resolved by BLS data coming back to ADP after peaks and the ADP data coming back to BLS after the minimum.  How will the divergence in 2010 be resolved?  It might be speculated that BLS corrections for the year, to be applied in two months, could bring the two data sets into closer conformance.  In March 2010, a negative correction of 830,000 distributed across 2009 significantly reduced the NFP for that year.  A similar adjustment for 2010 could bring BLS and ADP data very close together.

The alternative could be that this time ADP will move toward conformation with BLS numbers in the coming months, just the opposite of the changes after the early 2008 peak, and in the same manner as after the 2002 minimum.  If this were to happen then December and subsequent months could see ADP payrolls average at higher levels than NFP.

At any rate, as this story plays out over the coming months, we will learn something more about BLS methodology for NFP measurement and adjustment and how the results at turning points might differ from results at other times.