Take the ADP Jobs Number With a Boulder of Salt
There's no question Wednesday's reading on nonfarm private payrolls growth was an absolute blowout. ADP (ADP), the payroll processing company, said a record 297,000 jobs were added in December, nearly triple Wall Street's forecast. But before we pop the champagne corks in anticipation of the Labor Department's monthly jobs report Friday, it's important to remember that the ADP figure could be horribly wrong.
For one thing, ADP excludes government jobs. It's also notoriously volatile and has a history of big misses in forecasting the official number. (Economists, on average, expect Friday's report to show an increase of 140,000 jobs with the unemployment rate ticking down to 9.7% from 9.8%.)
Can Jobs Really Outpace GDP?
But perhaps most important is that Wednesday's ADP report just doesn't jibe with other recent data points -- or the pace of the economic recovery. As Peter Boockvar, equity strategist at Miller Tabak & Co., noted Wednesday, the ADP figure doesn't much square with this week's readings from the Institute of Supply Management on manufacturing or services, both of which showed declines in their respective employment components.
Even more curious is that the pace of economic growth doesn't support a record figure from ADP at all, writes David Rosenberg, the presciently bearish chief economist and strategist at Gluskin Sheff. "We never had [an ADP] number remotely this strong during the last economic cycle," Rosenberg told clients Wednesday. "[The] last time we were close was in February 2006 when real GDP growth was 5.4% at an annual rate."
Real gross domestic product came in at an annual rate of just 2.6% in the third quarter, according to the Commerce Department, and it's not expected to approach 5.4% anytime this year. "Even the most bullish forecast for [fourth quarter GDP] is 4%, consensus is at 2.5%," Rosenberg notes. "So either we have something on our hands that is much stronger than that or productivity is starting to sag. Or this number is BS. Take your pick."
"A 1-in-10 Event"
The ADP figure was led by huge gains in services, especially in small and midsize companies. Rosenberg suspects the better-than-expected holiday shopping season was responsible for the (likely temporary) lift.
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More troubling is that financial services -- which account of 8% of total private payrolls -- declined. That makes the odds of a similar blowout on Friday long, indeed. There have been 111 times when monthly private sector service payrolls rose by 200,000 or more going back to 1940, Rosenberg writes. Of those 111 times, only 11 were coincident with the financial sector shedding jobs.
"In other words, for the nonfarm payroll report to match what we saw in ADP would be a 1-in-10 event," Rosenberg says. Don't be surprised if Wednesday's shockingly good numbers fail to repeat themselves when the federal government weighs in Friday.
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