FYI | Dec 07 2007
By Rudi Filapek-Vandyck
The talk of town this week in US financial circles was the surprisingly strong November ADP National Employment report. From the moment the report was released showing an increase of 189,000 jobs for November, in combination with an upwardly revised 119,000 gain for the previous month, there was no holding back US equities on Wednesday.
A highly controversial government initiative to safe US mortgagees from defaulting “en masse” in the years ahead extended the momentum for US equities on Thursday.
The November non-farm payroll data, scheduled for release later today, are still widely regarded as one of the key data that will be taken into account when the Federal Reserve makes its interest rate decision next week. However, the unexpectedly strong ADP data have forced many an economist back to the drawing board. Market consensus was for some 60,000 new jobs in November but it would appear that revisions over the past two days will push up that figure to somewhere in the vicinity of 100,000 new jobs outside the US farming industry.
This still does not explain why Wall Street experts were seemingly so far out of line with their estimates other than the complaint from some market bulls that The Street had simply become too bearish on the US economy and on the global credit squeeze.
That is not how our favourite economist of late, Merrill Lynch’s David A Rosenberg, sees it. Rosenberg, who has been one of the more vocal bears in the market since August, comes as far as simply suggesting time will teach investors this week’s ADP release was nothing more than a silly fairytale.
Usually, you’d have to drag something like this out of an economist, and you’d probably still be forced to read it in between the lines, but not in the case of Rosenberg who states: [the ADP report] “could well have been one of the biggest head-fakes of all time”.
Rosenberg simply refuses to believe it, and he’s certainly not going to revise any estimates as a result of this week’s release. Mind you, inhouse indicators at Merrill Lynch put the odds of a US recession at more than 60% and Rosenberg suggests that’s all one needs to know in the light of the surprise ADP release.
The Merrill Lynch economist says his team follows ten surveys that have employment content in it, and only the ADP release showed an increase in November. Sounds suspicious?
Consider then that history shows numerous occasions when ADP overestimated the private payroll count by at least 130,000. Rosenberg has counted six of such occasions in the past five years. On one occasion, he points out, the miss was 180,000 – almost the number that was reported this week.
For unknown reasons any misses in the other direction (where ADP was too low) tend to be less off the mark. But there’s also a clear fundamental reason why the released number of 189,000 new jobs is hard to believe, says Rosenberg, as it would imply that private companies in the US have actually stepped up their staff loads at the fastest rate for the whole of 2007 at a time when domestic demand is flat to negative.
The ADP has overestimated job growth in four out of five last November readings, he adds, while pointing out the average overestimation is 50,000 jobs.
Last but not least, Rosenberg estimates that 189,000 new jobs would be consistent with approximately 3.5% GDP growth for the current quarter. Economic data so far (others than the ADP jobs figure) are indicating GDP growth for the December quarter may not be higher than 0.3%.
Even more important, if we would exclude the beneficial contribution from exports to US GDP this quarter (boosted by a cheaper USD) we’re more likely talking about a domestic economy that is contracting by some 0.3% (as opposed to growing), Rosenberg says.
Anyway you look at it, and Rosenberg seems to take into account that -by some miracle- the strong ADP jobs figure might still be followed up by a surprisingly strong non-farm payroll release later today, “that 189k print on ADP, whether or not it is validated in the NFP report on Friday, does not, in our view, accurately portray what is happening in the real economy”.
Makes one wonder what today’s non-farm payroll release will reveal, doesn’t it? But above all…how will Wall Street respond to it?
