Be Wary of the ADP Report Showing Large Employment Gains for December

Last Updated Jan 6, 2011 1:59 AM EST

There was a report from the ADP today indicating that 297,000 net private payroll jobs were created in December. That's good news, but there are two caveats to keep in mind. First, as John Keefe has explained, the ADP report does not appear to be very reliable. For example, though we can't be sure the BLS numbers that constitute the official measurement are accurate, the ADP report does not provide a very good forecast of the BLS numbers. In additions, they do not seem to have outperformed the BLS data in terms of accurately reflecting the state of the economy.

The second reason to be wary is explained by Real Time Economics:

But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don't remove them from officials payrolls right away to clear the rolls.
Ben Herzon of Macroeconomic Advisers explains: "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 [ADP National Employment Report] 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."
There is a general point here. We should always be wary about seasonally adjusted numbers around the holidays. If there is anything unusual about the holiday period for a particular year, that will distort the numbers, sometimes by a very large margin.

The same holds true anytime there is a big change in the usual direction of a series, e.g. around the turning points of business cycles (and we are also very close to a turning point). When conditions have been fairly normal for a considerable period of time, seasonal adjustment procedures are very helpful. But when there are changes, reliability can break down. The procedures do attempt to insulate themselves against making these mistakes. Nevertheless, the procedure is much less reliable during holidays, at turning points of business cycles, or near unusual periods more generally. That needs to be taken into account when interpreting the numbers.

In other news today, as my colleague Tim Duy reports:

Generally Positive, by Tim Duy: Today's ISM nonmanufaturing headline figure provided further evidence the US economy left 2010 on firmer footing. Generally solid internals as well, with both production and new orders posting solid gains. Like its manufacturing cousin, the weak spot was employment, a critical determinant for the evolution of Fed policy this year. ...On the inflation outlook, today's ISM release revealed a higher percentage of firms reporting higher prices. Firming demand may allow firms to pass on some of these cost increases to consumers, but as the Wall Street Journal notes, this isn't a bad outcome:
If higher commodities prices do trigger a small but manageable pickup in U.S. inflation, it will count as a success for the Fed's extraordinary efforts to avoid the ravages of deflation that have beset Japan these past two decades.
There's been enough good news recently to get hopes up, and anticipation is high, perhaps too high. Thus, though the BLS report will be subject to seasonal adjustment problems as well, it will be interesting to see what the report says. We could use some good news with the new year -- we had more than enough letdowns last year -- so let's hope the BLS report lives up to the expectations.