ECON OUTLOOK: Forecasting NFP Using ADP Data. Whispers Explained
The ADP Employment Report was released this morning. 22,000 jobs were lost in Janaury 2010. This was slightly better than the expected print of 30,000 job cuts but not far from consensus.
From the release…
Nonfarm private employment decreased 22,000 from December 2009 to January 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000. The January employment decline was the smallest since employment began falling in February of 2008.”
January’s ADP Report estimates nonfarm private employment in the service-providing sector increased by 38,000, the second consecutive monthly increase. However, this employment growth was not enough to offset continued losses in the goods-producing sector. Employment in the goods-producing sector declined 60,000, with employment in the manufacturing sector dropping 25,000. The employment decline in the manufacturing sector was the lowest since January of 2008.
Large businesses, defined as those with 500 or more workers, saw employment decline by 19,000 while small-size businesses with fewer than 50 workers, declined 12,000. Employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 9,000, the first increase in employment since January of 2008.
This Friday, the Bureau of Labor Statistics will release the EMPLOYMENT SITUATION REPORT, also known to many as Non-Farm Payrolls (that is only half the report). Jobs are clearly in focus as the main source of economic weakness in the US. Economic outlooks are highly correlated to the health of the labor market. This report will be a major market mover…
Because the Employment Situation Report is so influential in the marketplace, it is also a source of great speculation. One data release that provides a hint into the number of job losses the government will report on Friday is the ADP Employment Report.
In MBS OPEN I made the following statement regarding the outlook for NFP on Friday:
After this ADP report, expect to hear increased whispers for an NFP print around +50,000 jobs. Consensus is +5,000.
HOW DID I COME TO THAT ESTIMATE?
Below is a chart of the spread between monthly ADP data and monthly NFP numbers. The top portion of the graph subtracts the NFP jobs print from the ADP number (ADP minus NFP). The chart on the bottom is a six month moving average of the spread between the two.
The initial observation one might make is:
ADP has been reporting more job losses than NFP over the past few months. The six month moving average of the spread between the two has risen to 72,000. So ADP has been OVERSTATING job losses recently.
If this average holds true, it is possible Non-Farm Payrolls grew by 50,000 jobs in January. Here is the math just in case: ADP said -22,000 jobs were lost in Jan. If ADP is overstating job losses by 72,000…-22,000 +72,000 = 50,000.
To be honest, I find it highly unlikely that our economy created 50,000 jobs in January. On top of that, the chart above should tell you that ADP's relationship to NFP is pretty weak….but at least this will explain why you might hear NFP whisper numbers as high as +50,000 jobs.
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