ADP Reports Loss of 250,000 Jobs

There will be times when all the bad news that remains is already priced in. Over the past month, for example, economic news has been beyond dreadful, yet risk assets have not moved much, although they remain in very poor condition. The behavior of the financial markets in the face of such bad news is therefore a sign that the degree of preparedness for bad news is high. Nevertheless, the extraordinary conditions surrounding the current recession require more caution than usual, and it will not be safe to sound the all clear until the depth and duration of the recession becomes more obvious than it is now.

The divergence between data from ADP and the BLS might reflect the fact that many large firms, including large financial services firms, use their own payroll services. Divergences between ADP and BLS data could occur because ADP is capturing trends not yet picked up by the BLS but which will be captured in benchmark revisions to the BLS data. This seems less likely to be the case in the current situation, as both ADP and the BLS are likely overestimating the job count, mainly because the assumptions being made for the net amount of business formation have not caught up to the cyclical downturn. In other words, the jobs tallies have been kept higher than they would otherwise be because ADP and the BLS continue to adjust their data for supposed increases in jobs in industries that are currently shrinking -- in particular the construction sector, which is undoubtedly shrinking.

Whether ADP and the government are capturing the true state of the job market is an open question. It is likely that both are overstating the actual job count, with both assuming too great an increase in net business formation. This will become evident when preliminary estimates for the annual benchmark revision through March 2008 are released. The miss is likely to be close to 500,000 for the 12 months ended March 2008.