Handicapping the ADP Data Toward the Employment Report

Making Sense of ADP

Fool me once, shame on you; fool me twice, shame on me. After last month's wild ADP miss in forecasting the Employment Situation Report, the investment community is taking the latest big number light on the sugar.

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Handicapping the ADP Data Toward the Employment Report

ADP reported today on Private Sector Payrolls for the month of January, and the news was awesome. However, for those of us with intact memories, which basically includes the entire investment community thanks to wide media coverage of last month's fiasco, the reaction was tempered today. You see, it was only one month ago in which ADP forecast an addition of a powerful 297K private sector jobs, but got it horribly wrong. The community celebrated the news last month, and then suffered through a hangover when the Labor Department reported only 113K private sector jobs were created in December and 103K total new nonfarm payrolls (including public sector job losses of 10K).

This time around, ADP is forecasting that private nonfarm payrolls will show growth of 187K net new jobs. Even though that is sharply down from ADP's revised December forecast of 247K, its recent variance even after adjustment is leaving the investment community full of doubt.

I suspect there were two key reasons why ADP's data was off last month:

• ADP takes into account the final week of jobless claims and interpolates based on it, but claims had been offering illusory and extremely light tallies through the holidays. A difference between the season, in which perhaps claims-takers fell into deep depression instead of lining up at the unemployment office, and reality likely threw ADP off.


• While ADP's forecasting methodology takes seasonal variation into account, it likely does not incorporate variances in seasonal performance through different periods of the economic cycle. In other words, in tough economic times, I suspect seasonal variances to the downside are exaggerated or skewed, and I expect ADP's estimation model is not this sophisticated.

This month, recent weekly jobless claims heading into the report had deteriorated sharply, so there should be some downward pressure on the nonfarm payroll estimate from that. However, I also suspect hiring is not as robust as it might be during a normal economic period. Applying a thumbnail estimate, I would look for this coming Employment Situation Report to show nonfarm payrolls somewhere between last month's 103K and ADP's forecast of 187K (If you force me, I'll shoot for 120K). Bloomberg's survey of economists forecasts 150K, which falls in that range but may be a bit high. Also, I'm looking for the unemployment rate to move upward from the 9.4% anomaly reported in December. Economists surveyed by Bloomberg are conservatively forecasting a rise to 9.5%, perhaps held back by several economists who see the rate declining further. I say look for 9.5% to 9.6% unemployment.

ADP's data for January shows good growth in the service providing sector, with that major segment estimated to be adding 166K jobs in January. The goods producing sector contributed 21K, with 19K in manufacturing, according to the forecaster. Everything we've seen from ISM and others seems to agree here.

Small business took on the most employees, adding 97K according to ADP. That's to be expected from the important segment. Mid-sized firms, or those with between 50 to 499 workers, were said to have hired 79K new employees on net. Finally, large business hiring was estimated at just 11K additions.

Challenger Gray & Christmas also reported labor market data today, producing its regular report on Announced Corporate Layoffs. Challenger noted employers' plans to cut 38,915 jobs in January, the lowest on record for the month. Recent months' data have shown a saturation of firing, and it seems that given the current level of economic activity, very few layoffs can occur anymore. The bottoming that led to this situation was caused by panicked corporate managers who after having denied the recession would come, also decided it would be the most severe in history when they finally bought in and reduced capacity in an appropriate firing squad-like fashion.

Many, including me, believe that this leaves behind fertile ground for when the economy can gain real domestic born traction. The current imported growth that lifts us, through once weak dollar led export activity and the downward shift of American consumers seeking lower priced goods (made overseas), cannot drive significant hiring, in my view. There's likely little interest in the executive offices of corporate headquarters across the country to add more managers, without significant business expansion. A fair Yuan policy is what we need in order to get back the factory floor jobs that belong here. China needs to view this change as required or necessary in order for that to happen, and this can only occur if we give no ground and continue high pressure on the subject and negotiate with other issues. Also, we will need to find new ways to inspire American companies to hire, and I'll be sharing a few ideas in the near future.



Article should interest investors in Paychex (Nasdaq: PAYX), Manpower (NYSE: MAN), Robert Half International (NYSE: RHI), 51Job Inc. (Nasdaq: JOBS), Monster World Wide (NYSE: MWW), Korn/Ferry International (NYSE: KFY), Administaff (NYSE: ASF), Kforce (Nasdaq: KFRC), TrueBlue (NYSE: TBI), Dice Holdings (NYSE: DHX), Kelly Services (Nasdaq: KELYA), SFN Group (NYSE: SFN), CDI Corp. (NYSE: CDI), Cross Country Healthcare (Nasdaq: CCRN), On Assignment (Nasdaq: ASGN), AMN Healthcare Services (NYSE: AHS), Barrett Business Services (Nasdaq: BBSI), Hudson Highland Group (Nasdaq: HHGP), StarTek (NYSE: SRT), RCM Technologies (Nasdaq: RCMT), VirtualScopics (Nasdaq: VSCP), American Surgical (OTC: ASRG.OB), Medical Connections (OTC: MCTH.OB), iGen Networks (OTC: IGEN.OB), St. Joseph (OTC: STJO.OB), General Employment Enterprises (NYSE: JOB), Total Neutraceutical (OTC: TNUS.OB), TeamStaff (Nasdaq: TSTF), Stratum (OTC: STTH.OB), Purespectrum (OTC: PSRU.OB), Corporate Resource Services (OTC: CRRS.OB), Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), TD Bank (NYSE: TD), PNC Bank (NYSE: PNC), General Electric (NYSE: GE), Wal-Mart (NYSE: WMT), McDonald's (NYSE: MCD), Alcoa (NYSE: AA), American Express (NYSE: AXP), Boeing (NYSE: BA), Caterpillar (NYSE: CAT), Cisco Systems (Nasdaq: CSCO), Chevron (NYSE: CVX), DuPont (NYSE: DD), Walt Disney (NYSE: DIS), Home Depot (NYSE: HD), Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), Intel (Nasdaq: INTC), Johnson & Johnson (NYSE: JNJ), Kraft (NYSE: KFT), Coca-Cola (NYSE: KO), 3M (NYSE: MMM), Merck (NYSE: MRK), Microsoft (Nasdaq: MSFT), Pfizer (NYSE: PFE), Procter & Gamble (NYSE: PG), AT&T (NYSE: T), Travelers (NYSE: TRV), United Technologies (NYSE: UTX), Verizon (NYSE: VZ), Exxon Mobil (NYSE: XOM). The day’s earnings included Deere (NYSE: DE), Tiffany (NYSE: TIF), China Cord Blood (NYSE: CO) and Frontline (NYSE: FRO).

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