NFP Day (plus, ADP update)

*Sigh*  Another month, another Jobs number.

My thinking about all aspects of this monthly exercise has evolved. I have gone from regularly taking "The Under"  — a winning bet until we retired it — to  something more philosophical (dare I say "profound?"). We have come to recognize that the initial release of the NFP data by BLS is a number subject to such significant revisions that it is not of use to investors; Traders can play for a rally or a fade by identifying when Job sentiment in either direction gets excessive.

I used to be surprised/dumfounded/shocked by the initial reads. Now, I merely shrug and acknowledge that the hard number is of little value. The relative performance to prior cycles, and the overall trend (acceleration/deceleration) is all that matters.

The data from both BLS and ADP is not consistent with a strong economy. Remember, it takes about 150k per month to merely keep up with population growth — in other words, 150k new jobs per month is zero job growth as a percentage relative of total population and the labor pool. We were adding 250k-300k per month in the 90s, and even just two years ago when the housing boom was in full swing the numbers were in the 175-225k. 

So where are we? As the chart below shows, this remains one of the weakest post-recession job creation cycles in the post war era. And as we have seen over the past few quarters, even that modest pace of job creation is now decelerating. Following the ADP report (more on that below), there is very little expectation of much strength. That makes for several potential surprise outcomes (you can do the math yourselves).


Chart Courtesy Spencer England Equity Review (SEER)

Back to NFP: With ADP showing job gains of only 57,000 (the lowest since July 2003), and job growth revised down to 121K  last month, the consensus for NFP of 95K might even be high. The trend is decelerating job growth as the economy slows.


Back in January of this year, I gave a quasi-mea culpa about the ADP Report:

"Note: I used to mock the ADP data as being so awful, but since the big BLS revision, ADP turned out to be more accurate than originally appeared. While the jury is still out, I am trying to remain open-minded about their analysis;"

The original ADP data appeared to be wildly off from BLS.  ADP’s accuracy rate improved significantly., once BLS did their revisions. One can hope that the competitive pressure from ADP might spur BLS to become more accurate in their earlier releases. So I am grudgingly moving towards giving them a small bump up in credibility.

I still retain my criticism that ADP is not a neutral observer. Indeed, I retain my grave reservations about the entire trend towards non-government, non-academic entities with a vested interest in a particular outcome releasing these Econ data as a form or marketing/PR. ADP is but one in a series of private firms/associations that do this, including NAR, ATA, NAHB, ICSC, etc.  And while much of the data is worthwhile and helpful, some of the bad apples — especially those potentially interested party in the outcome — do spoil the entire bushel. (I can show you many ways the NAR data gets gamed).

Back to ADP:  According to a spokesperson for the firm, they have been working to improve their process:

* Quadrupling the size of the sample from the average historical sample size
* Improved outlier detection
* Enhanced seasonal adjustment procedures
* Reporting of industry and firm-size data

As I told them, I am retaining an open mind — more out of frustration with BLS than anything. There is a definite space in the market for better NFP data, and if ADP keeps improving their methodlogy, they might shake up BLS a bit.

UPDATE: March 9, 2007 2:55pm

Just a statistical correction to note: The Birth Death adjustment goes into the total employment count, not just the monthly totals — do not assume that 118k was tacked on to February, or 175k was subtracted from January monthly changes — I believe these guesstimates are incorporated into the entire Employment total (i.e., 144.6 million), then the monthly numbers are deduced.

Yes, its somewhat fictional, and creates an inherent bias in the overall model, but its not like they are merely tacking on 100k per month . . .

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  1. Dan commented on Mar 9

    Today is the most important data point of the week, by way of Non Farm payrolls, now expected to rise 95K following last month’s 111K rise. If inline, the number would show the slowest rate of job growth in two years, and would be just about half of the average job growth during 2006. As well, it is well below the amount of jobs necessary just to keep up with the growth in the labor force. The report comes on the heels of the ADP report which showed growth of 57K private sector jobs, as well as an increasing level of jobless claims. Assuming 25Kish Gov’t jobs were created, the risk appears to be to the downside in the employment number. But as I’ve said throughout the week, the number is subject to wild revisions and thus, in practical terms, it’s rendered useless for the most part. Avg hourly earnings exp to rise .3%. Also at 8:30 is the Trade Balance, exp to fall to -$59.8B from -$61.2B.

  2. Caravaggio commented on Mar 9

    The very latest implied forecast from the CME Economic Derivatives forecast is indeed lower than the analyst consensus. Right now, it is at 75.5 K.

    I like this number better than the Bloomberg consensus because it is bang up to date, incorporating all new information in the market (ADP report, etc). Of course, this doesn’t mean it’s significantly more accurate, but it does contain more information and its from people who are putting hard cash on the line.

  3. commented on Mar 9

    Opening Bell: 3.9.07

    Microsoft’s Gates again tops list of world’s richest people (AP) Microsoft’s search strategy may be stuck in neutral (if not reverse), its Zune will never be the iPod, and sales of Vista may be ho-hum, but none of that means…

  4. Cherry commented on Mar 9

    Employment may have peeked last December, starting to trend downward, even after upward revisions. February screams lower revisions(for the first time since?). If March comes in weaker yet?

  5. Cherry commented on Mar 9

    what a joke.

    lets do the math. 118.000 jobs via the black box “birth death model” (vs 116.000 in 2005 were the economy wasn´t in a downturn) and of the 97.000 created were 39.000 40% government jobs. ouch! very very weak.

    BLS the next to be whistle blown lol? Only reason why UE rate dropped to “4.5%” was because of the dropping LFP. Very very suspicious so far this expansion that LFP has been. Just think if they got caught………….The UE rate has been “off” since the recovery got underway in middle 2003 and the economy has only grown about at the historical average which implies 5.1-5.5 UE rate. Something stinks in the state of Neo-conmark.

  6. Mike commented on Mar 9

    I’m not arguing that this is a strong jobs recovery, but frankly, I’m sick and tired of people comparing various economic statistics to “the 90’s”. For whatever reason, the 90’s were an uncommonly strong time economically, and they ended in a more severe than normal bust! You have to look at the complete cycle, all the way through the dot-com bust! And more importantly, the 90’s boom evolved from a more severe economic trough than we had before this recovery (I think).

    I think it stands to reason that the milder recession, the milder recovery. The initial job loss was less, so the job gain on the other side has less “low hanging fruit” to pick off. How about some “normalized” charts? Show us the monthly jobs growth/decline or something from peak to trough to now. The raw numbers by themselves are apples and oranges IMHO.

  7. Cherry commented on Mar 9

    I’m not arguing that this is a strong jobs recovery, but frankly, I’m sick and tired of people comparing various economic statistics to “the 90’s.

    I am also sick of your whining Mark when this expansion is supposed to be “close” to the 90’s. The BLS may be just another bigger picture of Neo-con mind games and lies, a few slips of the LPF rate will do such a thing. A 5.3%UE rate isn’t as sexy as a 4.5% rate, and in the mind of the invester, a HUGE difference. The fact is, I am not the only one that has had suspicions about them since the 2003 recovery got underway. It simply doesn’t add up.

  8. OldVet commented on Mar 9

    The Fed has been conducting 1 day repurchase agreements [“repos” or short-term loans] for much of the past week in amounts ranging from $4-7 billion. These funds recently have been done beneath the Fed Funds rate. Thursday’s 14-day $15 billion repo gives the dealers two weeks to do something with the money. Two more weeks of asset inflation in the stock markets, anyone? I’m email Bernanke today with a sharp message about prudent stewardship .

  9. metroplexual commented on Mar 9

    While I am no economist, I generally do not view this current recovery as a recovery. When you are just borrowing against equity (MEW) to maintain your standard of living that is not a growing economy IMO. Especially when you look at the graph of the growth minus MEW.

  10. joe commented on Mar 9

    “Indeed, I retain my grave reservations about the entire trend towards non-government, non-academic entities with a vested interest in a particular outcome releasing these Econ data as a form or marketing/PR”

    BR, that’s a fair point, however, I hope that you have even graver reservations about government entities with vested interests releasing data.

  11. Fred commented on Mar 9

    “I am also sick of your whining Mark ”

    Lol…want some cheese with YOUR whine Cherry??!

  12. Teddy commented on Mar 9

    Fred, the Easter Bunny was upset that his eggs doubled in price in the last 3 months, but with the increased liquidity in the markets, he feels he will be able to make a profit. But the cooks preparing the Easter dinner have been crying while peeling the onions cuz the cost of da onions also doubled.

  13. erik commented on Mar 9

    barry or anyone,

    ge has been a good barometer for future market direction. over the past month or so it can’t even catch a bid when we bounce. furthermore, based on the ratio of ge:spy it’s about as cheap as it has been in the last decade (relative to the index). if instutional money is running from the protective shoals of a mega cap company such as ge, does this bode ill for stocks in general. i see it as pretty bleak for future market expectations.

  14. jkw commented on Mar 9

    from Mike:

    For whatever reason, the 90’s were an uncommonly strong time economically, and they ended in a more severe than normal bust! You have to look at the complete cycle, all the way through the dot-com bust! And more importantly, the 90’s boom evolved from a more severe economic trough than we had before this recovery (I think).

    So the 90’s ended in a more severe than normal bust, which was actually a very mild recession? How was it a severe bust and a mild recession at the same time? Can’t people still make arguments that don’t refute themselves?

  15. Eclectic commented on Mar 9

    No fundamental differences in anything existed from the period seconds before the BLS release to seconds after.

    However, the net observation to any reasonable and logical observer is that both ADP and BLS are indicating a slowing of the increase in jobs. See the data and observe the charting and you must agree or deny the data:

    According to the underlying mathematical functions that must express the dynamic that would ultimately reveal a declining job market, that same function of “X” or [F(X)] must have a first order derivative, or [F'(X)] “F prime at X.”

    In theory that prime can never reverse to negative from a positive without first proceeding incrementally (regardless of the size of the increments) though positive expressions of prime. I’m talking about the slope of the curve, and it still must reverse through “O” and probably do this before we can see a truly statistically significant reversal occur. I believe this is still true even with an atomic explosion, although the reversal happens pretty quick I’m told.

    We’ll see if this reversal that is hinted at by both ADP and BLS continues over the next few reporting periods or not, but the bond market running from this report today is of no consequence to the underlying trend, as yet, whatever it turns out to be.

    None of this changes the last two very specific, and in my mind almost prayerful, speeches of Mr. Bernanke.

    I’ll say again, as I’ve said before… having a current opinion that ADP is not accurate is absurd when the data are examined in comparison to the data from BLS.

    One may intend to demonstrate a macroeconomic transition and, through “willfulness” prefer that the data support that opinion… however, the data is in the realm of science and beyond opinion, mine or anyone’s.

  16. V L commented on Mar 9

    The numbers are as expected (eventhough many expected much lower), the consensus was 95-100K.
    In addition, 39K (~40% of 97K) were government artificially created jobs (the government is out of control, it keeps borrowing and spending). Moreover, 31K were education and health services (another subsidized by the government sector through Medicare). (Leisure and government combined for 70K new jobs)

    The numbers are OK, but they are not suggestive of a “strong economy” (as some market cheerleaders bubbleheads keep lying about it on TV). I am concerned about the government out of control borrowing and spending to create these jobs.

    I am concerned about this fact from the report:
    “The Labor Department Friday said hiring last month in goods-producing industries fell by 71,000. Within this group, manufacturing firms cut 14,000 jobs, while construction firms shed 62,000, the steepest monthly decline since January 1991”

  17. ac commented on Mar 9

    While I think the BLS is a bunch of imcompetent yahoo’s, even their numbers have beeing showing this easy:
    1.Growth output began falling last Augest.
    2.December labor output crested.

    The economic boom is over(if there ever was one). Consumer spending is fading during the 1st quarter and I suspect 1st quarter PCE to take a major hit in February. 0-1.5% growth Q1 2007, projects will get stalled, employers will rebuild stat sheets by laying off workers. Usually that indicates the actual beginning of the recession itself, thus a recession is unlikely through April. Though after April, all bets are off.

    Not in a recession yet, but the potential is there. Which we couldn’t say in 2006.

  18. diva commented on Mar 9

    I’m glad you are starting to see the light Barry. I have said several times before on these pages that I always knew the ADP data was better than the BLS data – because I know both organizations.
    I will also repeat that ‘capital’ has been empowered (at the expense of labor) in the current economic expansion due to the tax cuts on capital gains and dividends. If you folks don’t understand basic economics you are doomed to continual confusion.
    This is a different kind of economic growth period than we have had in many, many years.
    The Fed has been a problem…. but, the economy is doing OK in spite of them. (the Fed has created all of the inflation that we currently have by raising rates when they did NOT need to)
    Oh well…. even worse mistakes have been made in the past. These guys are only at the B- level. That is better than an F (that Greenspan earned several different times)

  19. diva commented on Mar 9

    PS: I currently work for a small company that has gone from 2 to 21 employees over the last 5 years. We do not use ADP. Quickbooks and Peachtree and other accounting tools allow very small companies to do their own payrolls. Mid-size companies use ADP. So: ADP also misses a large segment of the working/employeed world. They are just much better at ‘real-time’ data collection than the Govt. (duh)

  20. Steve commented on Mar 9

    How can you say ADP data is better when ADP data is designed to track the BLS data?

    And in case you missed it, the reason why ADP just revised their entire methodology was because their real-time forecasting was failing.

  21. Alex Dannenberg commented on Mar 9

    I can see that ~150k people are added to the US population every month(
    gives the data), but how do I know how many people are entering the labor force each month? This is (number people newly of employable age) – (number people retiring) rather than (births – deaths) which is surely affected by the baby boomer bulge…

  22. Barry Ritholtz commented on Mar 9

    Check out the margin of error:

    The confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000).

    These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the “true” over-the-month change lies within this interval.

  23. greg0658 commented on Mar 9

    Jobs data needs more data collection. Maybe it exists but isn’t widely reported. Quintile wages need to be implemented instead of a single average wage.

    Service sector jobs (I chat at stores) many folks in this sector are 30 hours or less a week so benefits don’t kick in. This means nearly 2 people are needed to fill a work week job slot.

    And I think unemployment numbers don’t reflect people going in and out of the job sector if they are in and out for weather & holidays and do not build up unemployment benefits. This effect can be gamed by a controlling government.

    And I’ll second the notion that government jobs although required are actually a net job neutral condition because taxes pay them. If everyone had a government job would that make us a socialist or communist country?

  24. Eclectic commented on Mar 9

    Yes, Barringo, so wtf are you attacking ADP?

  25. Eclectic commented on Mar 9

    I must say that the majority of posts on this subject prove that the posters are a bunch of ignorant futhermuckers.

  26. Darin commented on Mar 9

    It seems that one possible reason this has been such a weak recovery in terms of jobs has to be attributed to the changes in the global labor market. With manufactures in the US on the decline, the increase in the China trade, and the increase in productivity and technology, it should come as no surprise that liberal trade policies are at the heart of the matter. This also clearly explains the growing disparity that the WSJ has pointed out on a number of occasions between the top 5% and the rest of the country in terms of their share of the wealth. The question, then, is one of sustainability. How long will it take for globalization to reach parity in the labor markets and what will the transnational economic mechanism be to increase/decrease money supply.

  27. Joan commented on Mar 9

    Bottomline: There must have been a doozy of a short-squeeze in Globex on the 8:30 a.m. release, implyin’ that the boys musta’ been bankin’ on a low number per the influence of the ADP report and those Street shills who hinted as much once that report was released.

    Expect: 95k
    Actual: 97k.

    Did you ever get the feeling that the BLS first takes a gander at Street consensus before they publish? Just askin’. Anyhow, here’s the details:
    . . . . . . . . .Expect Actual
    Mfg Payrolls -15k -14k
    Unemployment Rate 4.6% 4.5%
    Average Workweek 33.8 33.7

    Avg Hourly Earnings +0.3% +0.4%

    The BLS says that jobs were created in healthcare (+33k), prof and biz services (+29k) and food services (+21k). Wholesale and Retail were flat. Air transport lost 7k. Construction dropped 62k. Of course, the very cold and snowy weather is a factor, but not if you’re a builder in Arizona, I would imagine. So the +28k construction jobs added in January were followed by a -62k in February. Use your head when considering the weather in general. Because besides the fairly equal losses in res and non res construction, the BLS noted that “heavy construction” lost 10k jobs as well.

    Oh, who cares? I am so sick and tired of talking about doctor’s offices, laid-off sheet-rockers and bartenders, a shorter work week and a 6 cent increase in pay. When at the same time, we have a problem festering in the system, in case anybody is paying attention. So sorry if I can’t get too worked up about a 4.5% rate of unemployment when NEW, for just one, tiny example, ceases its business because its lenders are balking. That plus about another million BIG HINTS which for some reason, we are choosing to ignore.

    Question: Where are all the foreclosed-upon families going? Tents? If the abandoned homes had been of the spec variety (unoccupied), then who will raze them? But my favorite is Cramer who is pounding the table in favor Advance America, Cash America, that ilk, as a great way to play the middle-class lending crisis. Cool.

    I think I’ve had enough. You?

  28. greg0658 commented on Mar 9

    Group homes is the answer – if local governments will allow multi non relation families in a single family home. That zoning issue is rearing its ugly side around here. IE: to many cars on the street, property taxpayer rentals sitting empty.

    This sollution has other effects. Fewer electricy, gas, phone, cable connections and fewer furniture and durable goods needs.

  29. samuel commented on Mar 9

    Employment is a lagging indicator. The real problem is that America’s main economic unit is debt creation. It is what fuels the US economy. Now, that appears to be ending slowly starting with the subprime meltdown. When the credit creation process not only slows down but reverses and the deleveraging occurs then the US economy is screwed. I don’t see why the highly paid and educated financial elites can’t see this debt bubble as a disaster waiting to happen like I do.

  30. Eclectic commented on Mar 10

    See Chart 2, ‘Growth of Private Nonfarm Employment, Goods-Producing Industries.’

    …then Chart 3, ‘….Service-Providing Industries.’

    …then Chart 4, ‘….(all private nonfarm employment) by Size of (Total) Payroll.’

    After you do that, you’ll find that the argument often trotted out by the Say’s Law, supply-side, ‘Greatest Story Never Told’ crew over in Kudlowvia — that ‘creative destruction,’ as it moves the goods-producing job count to the scrap heap, is a good thing — is not quite as creative as they might imagine.

    For, if you take a look at those three charts it’s pretty evident that both the employment of the services-providing industries, and the level of total payroll of all sizes of businesses, seem to correlate pretty reasonably with the direction and magnitude of the level of nonfarm goods-producing employment.

    Now don’t get me wrong… I’m not an advocate of supporting the buggy whip industry, even though I do have a couple of shares left of Amalgamated Crawdad and Buggy that I’ll let go cheap.

    However, the Kudlowvians can’t have it both ways.

    They can’t at first boast of job growth and economic prosperity in NeverToldVille, partly by crediting the correlation of the same prosperity in the goods-producing industries in the U.S. arising after the recession of 2001 — and yet later, in a now obvious downturn of goods-producing employment, discount or deny the potential for an overall reversal in job growth and economic prosperity caused by that downturn, while simply blaming the decline of nonfarm goods-producing jobs on the supposed and desired concept of creative job destruction.

    Creative destruction is something that occurs over a much longer time span, with a much more shallow gradient than can be absorbed in the space of only a few years without destabilizing the overall job market and the economy with it.

    A goods-producing worker needs a great deal of non-goods-producing services, and when that worker doesn’t have work… he needs far less of those services than when he was employed.

  31. Eclectic commented on Mar 10

    Don’t get too excited Barringo.

    Sweet Bondie’s just having another little episode of frightful sleep and maybe just from a morsel of undigested beef.

    “The data from both BLS and ADP is not consistent with a strong economy.” –quoting your opening remarks.

    My guess is that the ‘under’ is the bet for some time yet.

  32. V L commented on Mar 10

    “The jobless rate fell to 4.5% from 4.6% because people dropped out of the labor force, not because unemployed workers got jobs. According to a survey of 60,000 households, the labor force fell by 190,000 in February, the biggest drop in more than three years. Employment fell by 38,000. Unemployment fell by 152,000 to 6.9 million. The labor participation rate fell a tenth to 66.2%”

  33. Mike commented on Mar 11

    I’m not arguing that this is a strong jobs recovery, but frankly, I’m sick and tired of people comparing various economic statistics to “the 90’s.

    I am also sick of your whining Mark when this expansion is supposed to be “close” to the 90’s. The BLS may be just another bigger picture of Neo-con mind games and lies, a few slips of the LPF rate will do such a thing. A 5.3%UE rate isn’t as sexy as a 4.5% rate, and in the mind of the invester, a HUGE difference. The fact is, I am not the only one that has had suspicions about them since the 2003 recovery got underway. It simply doesn’t add up.

    I am guessing this was addressed to me. And yes, I’m sure you are correct. All this data is generated by the “neo-cons”. The left was running the gov’t for 40 years but all those workers have been replaced by neos. No doubt Cheney is making the #s up himself! Put the kool-aid down dude.

  34. Barry Ritholtz commented on Mar 12

    Classic example of low expectations:

    Last week saw the markets nervous over recession talk – which had been reinvigorated the previous week by misreported comments by former Fed Chairman Alan Greenspan and then again by Greenspan later actually giving his own odds for recession this year – 30 percent incidentally, before this week’s data came out. A moderately healthy employment report killed the recession talk – at least for the day on Friday – and equities responded with a mild boost while Treasuries slipped.

    Jobs thump recession talk

    Moderately healthy? Give me a break!

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