Job Creation Surged In December

by: James Picerno

Job creation accelerated sharply last month, according to the ADP Employment Report. U.S. nonfarm private employment rose a seasonally adjusted 325,000 in December--up dramatically from November’s 204,000 net gain. December’s advance is the strongest monthly gain in the history of this series, which dates to 2000. ADP’s estimate for job growth is coupled with news that initial jobless claims fell a healthy 15,000 last week to a seasonally adjusted 372,000, or the lowest level since May 2008. It’s starting to look like there’s a tailwind in the labor market. The recent drop in jobless claims has been anticipating as much and the forecast appears to be turning into reality.

The next test is whether the ADP report finds support in tomorrow’s far-more influential jobs report from the U.S. Labor Department for December. Judging by the ADP data, there’s reason for optimism. As the chart below shows, there’s a fairly tight relationship between the ADP and Labor Department date through time. The two data series fall out of line in the short run, but the gap doesn't often linger. The fact that the latest ADP number is relatively elevated vs. the last data point from the government implies that tomorrow’s update will be favorable.

The consensus forecast anticipates a 170,000 gain in the government’s update for private payrolls, according to Briefing.com. But if today’s ADP news is an indication, tomorrow’s report may bring a sizable upside surprise. Some analysts are leaning in that direction. Briefing.com’s forecast, for instance, calls for a 200,000 gain for tomorrow’s report.

Preliminary estimates are vulnerable to revisions, of course, and so today's ADP number should be viewed with some suspicion. As Bloomberg explains:

The December ADP number may have reflected the so-called purge effect. Workers, regardless of when they are dismissed or quit, sometimes remain on company records until December, when businesses update, or purge, their figures with ADP.

The paycheck processor estimates this change when adjusting its data for seasonal variations and, because there were fewer firings at the end of 2011 than in previous years, ADP may find it more difficult to formulate a projection, according to economists like Peter D’Antonio.

“This huge purge of workers is beyond the scope of normal seasonal adjustment,” D’Antonio, an economist at Citigroup Global Markets Inc. in New York, said in a research note before the report. “So the ADP folks have to make huge assumptions for December that often widely miss the mark.”

ADP’s initial figures for November showed a 206,000 gain, while the Labor Department’s data two days later registered an increase of 140,000 in private payrolls for the month.

But there’s no denying that initial jobless claims have been falling steadily since last spring. History suggests this is a strong signal that job creation is on the upswing. Today’s ADP news falls in line with that outlook. Let’s see what tomorrow’s payrolls report from Washington brings.