Thursday, 6 March 2008

ADP Report Suggests Zero Growth in NFP's

The ADP employment report has been notoriously poor indicator of employment growth in non-farm payrolls in recent months. However it's still worth taking a look at. from

Nonfarm private employment declined 23,000 from January to February 2008 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from December 2007 to January 2008 was revised down 11,000 to 119,000. February’s decline of 23,000 signals a deceleration of employment growth across businesses of all sizes.

Employment in the service-providing sector of the economy grew 47,000, while employment in the goods-producing sector declined 70,000, the fifteenth consecutive monthly decline. Manufacturing employment fell 40,000 in February after declining a revised 3,000 in January, and marked the eighteenth consecutive monthly decline.

Most of the decline in employment during February was accounted for by job losses at large companies, but there was a notable eceleration of employment growth at businesses of all sizes. Employment among small-size businesses, defined as those with fewer than 50 workers, advanced just 15,000 during the month, while employment among medium-size businesses with between 50 and 499 workers dropped 4,000. This was the first outright decline at medium-size businesses since June of 2003, when job growth was still recovering from the last recession. Employment at large businesses with more than 500 workers declined 34,000.

Using the basic rule of thumb, add 25,000 government jobs to the ADP number and you get a forecast for Friday's NFP result of about flat growth in NFP's. If that were to be the case the unemployment rate would probably rise as it would not keep pace with growth in the labor force. However as stated before the ADP report has been a poor predictor of NFP's.

Of more interest in this report was the observation (highlighted in bold above) that employment growth at small businesses slowed substantially and that job growth at medium sized businesses actually declined for the first time since 2003. Why is this important? Because more than 80% of US jobs reside at small and medium sized businesses.

Clearly employment trends are not positive. That said the NFP report is difficult to predict. Although evidence suggests flat growth in employment in February the number could easily be plus or minus 100k. As always watch the revisions data. If January's number is not revised up and February comes in negative, 2 consecutive months of payroll declines will be strong evidence that a recession is already underway.