Thursday, 4 October 2007

ADP report suggests sluggish growth in NFP's

Friday's Non Farm Payroll numbers are seen as vitally important in determining The Fed's position on further interest rate cuts. Many believe that the surprisingly weak payroll number in August was a key determinant in pushing the Fed to cut the Fed Funds rate by 50 basis points at their last meeting. The monthly ADP payroll report out today usually gives some guidance as to what we can expect from NFP's.


Nonfarm private employment grew 58,000 from August to September of 2007 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from July to August was revised down by 11,000 to 27,000.

This month’s ADP National Employment Report was the third consecutive weak reading and confirms the recent deceleration of employment.

In September, employment in the service-providing sector of the economy grew a moderate 97,000, while employment in the goods-producing sector declined 39,000. This marks the tenth consecutive monthly decline in the goods-producing sector. Employment in the manufacturing sector declined 22,000.

Interesting that August was revised down further. 58,000 is an improvement on August but as the report says it continues a weak trend over the last three months. What does the ADP report say about the likely NFP number on Friday?

As can seen above the ADP report, which has only been produced since May 2006 initially had questionable correlation with the BLS data. However since a little tinkering of the ADP methodology at the end of 2006 the correlation between the two reports has been much stronger.

Since the ADP report doesn't cover government jobs the rule of thumb is to add in some 20,000 government jobs not covered by the ADP report. Thus the ADP report is pointing to growth in NFP of about 80,000 in September. Not disastrous but below market expectations of over around 110,000.

Job growth has averaged just 44k per month over the last 3 months according to the BLS. Also if last year is any guide, the BLS's magical birth/death adjustment plays a more minor role in the employment picture. In the 5 month period Feb 07 - Jun 07 the birth/death adjustment added 1.1 million jobs. In the 6 month period fom Jul 07 to Dec 07 the birth'/death model added just 364k jobs.

Last month the B/D adjustment added 120k jobs to employment and since the ADP report was revised lower the August numbers could also be revised lower. Then again the B/D adjustment is a bit of a lottery. Until Friday....

click on image for a sharper view

The above chart comes from the ADP report. What it shows is that employment is not yet in recession like territory of the 2001 period. As argued before I believe a recession is on the horizon sometime in 2008 and therefore we are unlikely to see recession like employment numbers for at least 3 - 6 months.