Why That ADP Report May Not Be Nearly As Good As Advertised

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Photo: Associated Press

This morning’s ADP data on unemployment came in shockingly high at 297,000 new jobs created.This is the largest number ever for the ADP and is certainly good news for the economy.

But there remain some doubts as to whether or not this jump is for real.

Macroeconomic Advisers, the company that compiles the data for ADP, think the “December Purge” may have been overestimated (HT Nomura).

From Macroeconomic Advisers’ blog:

Whether employed throughout the year or not, employees of ADP’s clients typically remain on payroll records until December, at which point those no longer employed are “purged” from the records.

This effect typically boosts growth of the unadjusted NER data relative to actual employment from January through November and subtracts from growth in December. This and other seasonal patterns are removed from the NER data in the seasonal adjustment process.

If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from NER growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large.

So the December purge factored in may be too high and may have made the ADP look bigger.

But Macroeconomic Advisers also believe we’ve been misunderstanding retail jobs growth.

There was an inexplicable drop in seasonally adjusted service-sector employment in the official November employment report, and much of the weakness was in retail trade. One theory out there is that the gap between the reference week (the week that included the 12th of November) and Black Friday was unusually large this year, suggesting that many hires in the retail industry took place too late to be reflected in November payroll employment.

So, yes, this number was strong, it’s likely to remain strong, but this massive beat may be a little misleading.

Check out Jan Hatzius’ answers to the 10 pressing questions on the U.S. economy >

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