The latest ADP employment report, which showed that the private sector shed more than a half million jobs in January, became the latest economic report to add to the already bleak jobs picture for the U.S.
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said its employment index showed that 522,000 jobs were surrendered by the U.S. private sector last month, indicating that the next government report on nonfarm payrolls, due Friday, could likely be the third-straight report to show more than 500,000 losses.
ADP, which is touts itself as the top source for the widest range of human resources information, payroll processing, and tax and benefits administration, compiles anonymous payroll data for its report but does not include government jobs data.
The report is not considered the most reliable predictor of the Labor Department's employment report. Last month, ADP said its December index showed that private-sector employment fell by 693,000. Although that figure was revised Wednesday to 659,000, it is still well above the government's December total of 524,000 job losses.
Ian Shepherdson, chief economist High Frequency Economics, said that the ADP figure for December was so much weaker than the official payroll data that he expected a correction back to a loss of 400,000 jobs in January.
"This didn't happen, which might signal that the official number on Friday will be worse than the -540,000 consensus," Shepherdson wrote in an email. "Either way, there can be few doubts that the disaster in the labor market continues, with firms of all sizes and in all sectors cutting jobs. Manufacturing is being hit hardest ... but nowhere is safe."
The evidence against the ADP as an effective crystal ball doesn't end with December's discrepancy. In the final five months of 2008, the ADP employment index differed from the Labor Department's revised tally of job losses by an average of nearly 135,000. The widest gap came in September, as the ADP report showed a loss of 224,000 jobs during that month while the government's report recorded a total of 403,000, a difference of 179,000.
"The ADP is only a better indicator of a portion of the nonfarm payrolls," said Paul Mendelsohn, chief investment strategist with Windham Financial. "If you were looking in terms of what corporations are doing and what layoffs would mean to earnings, the ADP report would be more significant. But if you're looking at what's going on in the whole economy, the Labor Department numbers are more specific."
Still, the latest ADP report is nearly spot-on with current estimates for the Labor Department's employment report. Economists vary in the exact figure, but most fall in a range from 525,000 to 575,000. Does that mean the ADP report is getting better at predicting what the Labor Department will say about job losses?
"The Labor Department numbers have been very consistent in terms of the number of jobs we're losing every month," said Mendelsohn. "You can't expect that number to spike in any direction. That's becoming an easier and easier number to forecast."
Mendelsohn says that while the ADP and the Challenger Gray & Christmas numbers and expectations are somewhere in the ballpark, a case can be made that as the number of job losses increase, the percentage of error goes down.
"When you were running at 125,000 job losses a month, if you were off by 25,000, it was a huge difference," he said. "But if you're off by 50,000 here against 525,000, that's a smaller differential. The impact becomes muted."
Joel Naroff, head of Naroff Economic Advisors, argues that there is a strong possibility that the Labor Department's number on Friday will come in better than the ADP employment index indicates, creating yet another monthly gap between the two figures.
"Don't be surprised if the number Friday is less than what the ADP is talking about," said Naroff, who expects the government's nonfarm payroll number to show a loss of 450,000 jobs. "It's a composition issue. The Labor Department doesn't capture small- to mid-sized business layoffs as well as the ADP report. It's critical for a reading on the economy."
Challenger Gray & Christmas also piled onto the bad news, saying Wednesday that record downsizing in the retail sector helped push the number of planned job cuts announced in January to 241,749, which would make it the largest monthly layoff total since January 2002.
"The variety of industries represented among the top five job-cutting sectors in January is further evidence of how far the impact of this recession has spread. Industries that at first appeared to be immune to downturns, such as computer and pharmaceutical, are now rapidly shedding workers," said John Challenger, CEO of Challenger Gray & Christmas, in a release.
Challenger added that there is "no light at the end of the tunnel yet" and that even if President Barack Obama's stimulus package, working its way through the Senate currently, could "take months to make a noticeable impact on the employment picture."
But while the economic data are backward-looking in nature, many market observers and economists are troubled by more big-number layoffs announced by several companies in the past few days. Despite being less than a week into February, some companies have already announced intentions to eliminate thousands more positions.
expects to cut 5,800 positions through 2011,
will eliminate 500 jobs,
Time Warner Cable
slashed 1,250 jobs,
will cut 725 jobs,
will eliminate 760 jobs,
will trim 100 more jobs on top of the 1,000 it announced in December, and
will layoff 600 workers.
The U.S. isn't the only country absorbing heavy job losses. Japan's
said Wednesday it was slashing about 15,000 jobs and shuttering 27 plants worldwide, echoing cuts made by rival
. Additionally, U.K. drugmaker
is rumored to be cutting 10% of its workforce, or 10,000 jobs.
While it may be hard to find a silver lining in the fact that so many U.S. workers are being laid off, Naroff said that companies are aligning their cost structures quickly rather than stretching the period out. That, Naroff argues, could lead to an economic recovery sooner.
"We're seeing a compression of the adjustment process," said Naroff. "The layoff pattern is likely very different than in the early 1990s and the 1980s. Everybody knows we're in a steep recession, so there's no reason to wait anymore. In the past, we would've seen a series of layoffs. The implication is that we're seeing huge layoff numbers, but after a period of time they disappear quickly. You'll see a period of terrible numbers followed by not-so-bad numbers."