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Which November Jobs Report Estimate Is Wrong?

BOSTON ( TheStreet) -- After the best three-day winning streak for stocks since March 2009, there's a lot riding on Friday's employment report. Unfortunately, investors are faced with two separate estimates that paint two very different pictures about the U.S. labor market.

After yesterday's announcement of coordinated action by central banks around the globe to add liquidity to the banking system, the S&P 500 surged 4.3%, capping a 7.6% gain over three days. Amid the euphoria, investors cheered the ADP Employment Report, which estimated that the private sector added 206,000 jobs in November, double that of previous months. For investors, it was a loud signal to buy stocks.

"November's increase in employment normally would be associated with a decline in the unemployment rate," Joel Prakken, chairman of Macroeconomic Advisers, said in a statement Wednesday. "An acceleration of employment is consistent with data showing that GDP growth, which slowed sharply around the turn of the year, is gradually recovering."

ADP's estimate compares with economists' consensus of 126,000, according to a survey by Bloomberg. TrimTabs Investment Research is even more cautious. The company said Wednesday that the U.S. economy likely added only 64,000 jobs in November, an estimate that went unnoticed by investors caught up in the exuberance of a nearly 500-point gain on the Dow Jones Industrial Average.

"The sharp deceleration in job growth in November has us concerned," says Madeline Schnapp, director of macroeconomic research at TrimTabs. "It appears that hiring managers have rolled up the welcome mat due to the raging debt crisis in Europe."

How could two firms measuring employment come to such disparate figures? The difference between ADP's call of 206,000 and TrimTabs' 64,000 is a staggering 142,000. For some context, the Bureau of Labor statistics said the U.S. economy added only 80,000 jobs in October.

ADP says its estimate for private payrolls growth is derived from actual payroll data. Chances are that your paystub has the ADP logo in the top right corner, which means the firm is measuring jobs in the most direct way it can.

TrimTabs' employment estimates are based on an analysis of daily income-tax deposits to the U.S. Treasury from all salaried U.S. employees. Schnapp says that while the measure isn't perfect, it's a better view than a survey subject to revision.

"Everybody looks to the BLS [Bureau of Labor Statistics] as the be-all, end-all when those numbers are substantially revised," Schnapp says. "We have no idea what the BLS is going to publish. We just look at how much money is in people's pockets. That's a measure of wages and salaries. Ultimately, that will determine how good the economy is."

TrimTabs says estimates using tax deposits are historically more accurate than initial estimates from the Bureau of Labor Statistics. Schnapps says that once the government is through with revisions, TrimTabs' estimates are usually within 10% of the final figure.

So how did Schnapp react when she saw the ADP Employment Report show a substantially greater increase to private payrolls than her firm's estimates?

"It is frustrating because it moves the markets," she says of the ADP report. "One of us is going to be closer to the truth. Everyone looks at how close you are to the BLS. I can only call what the numbers are telling me."

The numbers are telling Schnapp that there was a "pretty substantial decay in November." To explain the difference between her estimate and ADP's, Schnapp says that companies may have postponed their tax deposits until December because of the Thanksgiving holiday, although that should be followed by a bounce in tax-withholding data that we haven't seen yet.

"It could also be that people changed their withholdings, but that doesn't happen until January," she says. "We're all over tax increases, so I doubt that's a factor. So you get back to that the tax withholdings are weaker. Considerably weaker. Unless there's something we don't know could be impacting the data. We'll find out tomorrow."

ADP didn't immediately respond to a request for comment. But as the chart below shows, the total employment data from the Bureau of Labor Statistics doesn't always match up perfectly to the private sector employment data ADP collects.

Even though the government's nonfarm payrolls data will be released at 8:30 a.m. New York time Friday, investors may not ultimately find out who was closest until all revisions to the data come in. As we've seen, it took the Bureau of Labor Statistics more than a year to revise employment data for the months during the financial crisis, which isn't a big help to investors.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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