About That Other Jobs Report...

In the age-old parlor game of placing trades around the Labor Department's monthly employment report, a new wrinkle has been introduced on Wall Street that is suddenly receiving fresh scrutiny from investors.

Automatic Data Processing (ADP Quote - Cramer on ADP - Stock Picks), which handles payroll duties for large and small companies across the nation, hired a group of respected economists to use its data to produce its own measure of payrolls in the private sector. It comes out two days before the government's report is released on the first Friday of every month.

Since its launch in 2006, the so-called ADP National Employment Report has been adopted by economists and investors -- with encouragement from the company -- as an early indicator of the job market that can help divine which way the official statistics will break in relation to expectations in the market. That said, those who shift around their forecasts based on the ADP report often get burned as a result, leading some to question the report's credibility.

"[The ADP report] keeps getting touted as a curtain-raiser to the government's report, but it simply has not lived up to that," says Jeff Hall, chief U.S. economist with Thomson Financial, a firm that polls Wall Street's economists and analysts and reports their average forecast as representative of expectations on Wall Street. "Despite the temptation, I've never adjusted my numbers based on the ADP report, and I'm glad I haven't. The market needs to move away from its adherence to the ADP report. People are putting way too much stock in it."

Trading on Wall Street is all about expectations, and at no time do those expectations get more attention than in the lead-up to the release of the government's monthly employment report. As far as closely-watched data points on Wall Street go, jobs is probably the most relevant on Main Street, so the release of the government's employment report marks one time every month when financial news is almost guaranteed to be front-page news.

For that reason, the jobs report takes on added significance, and the market's reaction to its frequent surprises can be all the more dramatic. Politicians use the payroll numbers as a way of settling scores in debates over economic policy, and Federal Reserve watchers regularly bat them around as an excuse to call for a change in monetary policy. In times of increased economic uncertainty, the monthly jobs data becomes a key way for economists to determine whether conditions are getting better or worse.

The release of January's report was just such a time, with a debate raging in the markets over whether or not Wall Street's credit crisis and the U.S. housing market downturn is causing an economic recession. With that in mind, expectations for last Friday's data were conservative, with consensus estimates showing economists expecting the economy to have added 65,000 jobs to nonfarm payrolls for the month.

Then, ADP raised hopes for a strong number on the Wednesday leading up to the government's release when it reported that the economy added 130,00 service sector jobs in January. If that was accurate, then the government's report would likely be even larger, since it measures both public and private sector jobs. Several Wall Street economists responded by adjusting their forecasts higher, only to be disappointed when the government's official data arrived Friday morning to show a surprise decline in nonfarm payrolls by 17,000 jobs.

Lehman Brothers economist Ethan Harris responded to the ADP Report by adjusting his estimate in what proved to be the wrong direction, from a gain of 70,000 jobs to a gain of 90,000.

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