ADP Jobs Report Spectacular - But Wait Until Tomorrow

By David Berman

If you believe that the upbeat ADP report on U.S. private sector employment marks an important turn in the U.S. economy, you might want to sit back and wait a day.

Sure, the numbers in the report were strong – unbelievably strong. The report showed that private sector employers added 325,000 jobs in December. That not only decimated the 175,000 jobs expected by economists, it also marks the biggest gain ever for the employment survey in its 10-year history.

However, economists caution that Friday’s official nonfarm payrolls report from the U.S. Labor Department might not show quite as much progress in employment gains. That’s because the ADP report is notoriously volatile, especially at the end of the year.

Right now, according to Bloomberg News, the consensus among economists is for the payrolls report to show overall gains (that is, gains in private sector jobs and a drop in public sector jobs) of 150,000, up from 120,000 in November. The unemployment rate is expected to rise to 8.7 per cent from 8.6 per cent.

Here are a few comments:

Nathan Janzen, Royal Bank of Canada: “The outsized employment gain in the today’s ADP report could suggest some upside risk to our call for private employment to increase by 137K in tomorrow’s official December BLS payroll report (and our call for a headline increase of 120K); however it is worth noting that the ADP data are notoriously difficult to seasonally adjust in December, owing to differences in the way that ADP and the BLS collect their data. As well, even without this year-end distortion, the ADP report has a spotty record at predicting monthly BLS payroll employment changes.”

Ian Shepherdson, chief U.S. economist, High Frequency Economics: “This is spectacular, and it fits our view that the economy is in better shape than is generally believed, but we have to be cautious. The decline in jobless claims and the improvement in indicators of labor demand clearly suggest the labor market is improving, but not to this extent. ADP is the single best indicator of official private payrolls but the error in single months can be more than 200K either side.”

Robert Kavcic, economist, BMO Nesbitt Burns: “While a grain of salt probably needs to be taken with this very strong [ADP] report, there is undeniably upside risk to tomorrow’s payrolls report, and when taken with the broader range of indicators, is another indication that the U.S. labour market continues to improve.”