Wednesday, December 1, 2010

ADP Employment Reading Bodes Well for Near 200K Official Job Growth Figure Friday

I mentioned Monday it would be a big week of economic data and I expected much of it to surprise to the upside, so despite the technical weakness Monday and Tuesday in the market, I did not want to step in front of the data.   As written Monday

With a rebound in Chinese economic activity and a seasonally stronger part of the year in the consumption driven domestic economy, I expect data to continue to be 'stronger' through early 2011. After the global push to feed the holiday U.S. consumption machine finishes up - along with a spate of seasonal hiring - it will be interesting to see how the economic figures fare post February '11. Even more so if China continues a stronger path of tightening to rein in their inflation issue.

The Chinese came though last night in their purchasing managers index, and the ADP employment print north of 90K bodes well for an upside surprise Friday. 

I suspect the monthly employment estimates will undercount the surge of temporary retail hiring; combined with the nonstop (through recession or not) increase in birth death model adjustments, we could see a surprise Friday to the upside.

ADP comes out the Wednesday before the monthly data and it covers the private sector.  The U.S. government has their own way of guessing the private sector and it includes their estimate of small business creation/destruction (and the jobs associated with that) called the birth death model.  [Jan 27, 2008: Monthly Jobs Report & Birth/Death Model] The spread between the two has lately been in the 70-90K range.  Hence the ADP print of 93K should mean a figure close to 200K Friday, which would beat the consensus of 168K.

whatever ADP comes in at Wednesday we can usually add 60-90K extra (which usually measures nicely with the birth death model) - hence an ADP figure north of 100K means we could see close to 200K jobs added the way the federal government guestimates.

The wild card is (ironically) government jobs, as we are now finally seeing some minor right sizing at the local level to account for the huge drop in local revenues (vs 2006-2007 levels) caused by the housing depression and general economic contraction. 

Technically you cannot just add the birth death figure to the private sector figure (it's not straight addition or subtraction) but for figurative sense we can think of it like this

ADP private sector + federal government finger in the air via birth death = government's version of private sector +/- government work.

In figures

93,000 (ADP) + 110,000 (birth death) - 15,000 (government jobs) = +188,000

Again let me stress that is not how the actual math works, but just a representation of why I think we could get to 200K Friday.


Now of course this leads to the fact that much of the job creation in the US of A the past year and a half has been government's finger in the air guess of birth death adjustments in small business - much of it most likely fanciful modeling rather than reality.  (the government said countless small businesses were creating tens of thousands of jobs even in the darkest days of the Great Recession)  But today in the ADP report we actually saw small business creation of just over 50,000 which is a positive.

Interestingly the market was up huge in premarket based on the Chinese PMI data and reacted very little to the ADP data, even though it points to a surprise upside Friday.  Either way we are now the top end of the S&P 1172-1200 range, and at 10 AM is the ISM Manufacturing report.  Back on Sep 1 we had a monster day in markets based on a combination of Chinese PMI + US ISM upside surprises, so let's see if three months later the 10 AM number can create a repeat event, and push the S&P 500 through 1200.

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