The stock market has been up so far in September, a somewhat unusual event for the weakest month in stocks. The optimism is propelled largely by decent news on jobs, with weekly initial unemployment claims dropping to their lowest level since 2008 at 323k. But the big news was the ADP Employment Report, which came in at 176k jobs gained in August. Investors are still watching for the official Bureau of Labor Statistics (BLS) report on Friday – but they don’t need to.
What is this ADP Employment Report, and what does it mean? It’s actually the best barometer of where we are, if not the official one, and it comes with a lot of useful information that can’t be found anywhere else. Since we’ve dissected the official BLS report it’s time to take a good look at the ADP numbers – and why they are in many ways much more interesting.
As we’ve discussed here before, the ADP report is the most useful because it is less noisy than the BLS employment report. The main difference between the two is that the official figures come from a survey taken among employers, the same methodology that has been in place since 1939. If the feds don’t call someone they don’t hear about their change in jobs. That’s important because fully 40% of the jobs gained in August came from businesses of less than 20 people – very small businesses. The BLS just can’t keep up.
ADP, by contrast, is a payroll firm for employers large and small that cuts about 10% of the payroll checks in the US. They simply extrapolate from the real data they have as to who was paid by whom. The data are very real-time and much more accurate. ADP, however, does not include government jobs, so there is always a note of caution at the end of the reports.
But we have good data now going back to 2001 from ADP, and it’s worth looking at the net change in jobs by month through the course of this Managed Depression. Here’s a chart from the St Louis Federal Reserve:
Note that ADP started publishing this report right about the time everything went south – lucky timing! The course of the “jobless recovery” through 2004 can be seen as the net gain in jobs didn’t reliably crack zero until then. From that time forward, job growth rarely beat 200k per month until 2006, and then only briefly. The big fall came in 2007 and plummeted into 2009. But the “recovery” after that official recession was, if anything, far more robust than the previous one. Still, topping 200k jobs gained per month has been elusive, especially in the late spring and summer of 2012.
It seems reasonable to divide these data into three categories – below zero (job loss) as a red zone, 0-200k per month a yellow, and above 200k green. As it stands now, the fall makes all the difference for 2013’s final reputation. But if you watch only one thing in the ADP report, it should be that 200k jobs gained mark. We need that.
The report itself, however, contains far more information than this headline number. As discussed before, this is the only jobs report that breaks down the net gain in jobs by the size of the employer. We know that job growth is coming from very small businesses because we have seen it month after month since 2008. Large companies still comprise only 18% of the net job gain, which is reflected in the number of people stuck with cut hours in a part-time job.
One of Barataria’s items to watch in 2013 is a net wave of hiring by large companies – about the only thing that could push the headline number reliably above 200k . But gains in corporate profits have not yet resulted in a hiring wave as they remain cautious.
Down towards the bottom of the report we can see this updated monthly in a chart by ADP showing net jobs by size of company, normalized to the peak of 2008. The different colored lines show the story very well:
The biggest firms are keeping pace with the medium sized (20-499) but those between 500-999 are simply not hiring people quickly. These data are confounded by the fact that companies shrink and grow over time, so we aren’t necessarily looking at the same companies in a time series. But the situation is very stark – the economy is indeed restructuring, with the highest growth in employment coming at very small companies such as start-ups and individual consultants.
In all, the ADP Employment Report is an extremely valuable snapshot of the state of jobs today and should not be relegated to second-tier status while everyone waits for the official BLS report. It’s a more accurate picture and in some ways far more interesting. We’ll keep an eye on it here, you can be sure.