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Thursday, December 06, 2007 2:55 PM

December Payroll Playbook

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Many people have been asking me about ADP Job Estimates.

Nonfarm private employment grew 189,000 from October to November of 2007 on a seasonally adjusted basis, according to the ADP National Employment ReportTM. The estimated change in employment from September to October was revised up 13,000 to 119,000. November’s increase of 189,000 marked a further acceleration of nonfarm private employment. The three-month average change in employment for September through November was 123,000, up from 43,000 during the three-month period from July through September.

The strength in employment during November was fairly broad-based. Even in manufacturing, construction, and financial services, sectors where employment has been under downward pressure, there are signs of accelerating employment.
My first thought was ADP was ignoring seasonality but a review of ADP Methodology & Methodological Enhancements shows otherwise.

Four Week Average Initial Claims Rise

While ADP is saying one thing the Weekly Initial Unemployment Claims Report is saying another.
In the week ending Dec. 1, the advance figure for seasonally adjusted initial claims was 338,000, a decrease of 15,000 from the previous week's revised figure of 353,000. The 4-week moving average was 340,250, an increase of 4,750 from the previous week's revised average of 335,500.
The week to week figures can be choppy, but the key fact is the 4-week moving average of claims is up from around 310,000+- a week a few months back to 340,000+ claims today. This most assuredly is not a sign of any strength.

Is the ADP survey an outlier of some kind?

That is possible I suppose and one explanation could be a final buildout of commercial real estate is about to end with this being the final push. On a purely anecdotal basis, just 3 miles from me a new Wal-Mart (WMT) store went up last month. Two miles from me a new Walgreen (WAG) store opened last week.

Is a similar situation happening across the country, where massive completion of stores and strip malls of all kinds are now hiring? This is hard to say, but if that is indeed the explanation then this is the last hurrah. Looking ahead Wal-Mart has recently cut the number of stores it is opening in the US next year on two occasions.

News is one thing, the reaction to it is another.

LIBOR did not drop on the ADP release even as the stock market was cheering. Today, 1-month LIBOR dropped precisely 1 basis point to 5.24 and 3-month LIBOR is flat at 5.15. Throughout the entire rally, LIBOR has been either flat or rising.

Please see Minyan Mailbag: LIBOR, What's The Big Deal? for more on LIBOR.

Yield Curve as of December 6th

click on chart for sharper image

Treasury Yields 2-yr to 30-yr
  • 02 Year Yield: 2.96
  • 05 Year Yield: 3.34
  • 10 Year Yield: 3.98
  • 30 Year Yield: 4:47
Is that a sign of strong job growth or a strong economy?

Curve Watchers Anonymous is asking: If the treasury market does not believe the jobs report then why should I?

Going Out On A Limb

ADP could be right but for the sake of argument I am going to guess 50,000 - 75,000 jobs reported tomorrow.

Professor Sedacca posted an interesting chart on the difference between ADP numbers and the BLS numbers.

click on chart for sharper image

The above chart shows that although the numbers tend to converge over time, any individual point is suspect.

Sedacca went on to say: "From my perch, I see a weakening economy. What am I paying attention to now? Credit card delinquencies and prime delinquencies. And I don't like what I see. Look for the Fed to move 50".

To that I will add the crisis in LIBOR is calling for 50 basis points if not more. However, if there is a strong jobs report, then perhaps a case can be made for 25.

But whether it's 25, 50, or 75, it is not going to help. The excesses of this 20 year credit boom worldwide are not going to be relieved by the same strategies that created the boom, nor will they be relieved by bureaucrats at the Treasury or in Congress attempting to dictate their will on the market with irresponsible price fixing tactics.

Mike "Mish" Shedlock
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