ADP: Stick to Your Knitting

Monday, July 10, 2006 | 05:53 AM

One of the more interesting issues I observed last week (albeit from a distance, margarita in hand) was the pre-NFP excitement generated by the ADP National Employment pre-release. I wrote before the NFP release that I had little confidence in the ADP report. 

Boy, did I understate the case. There are many, many things that the private sector does better than governments or academia (probably most!); objectively compiling complex data and releasing it at no cost to users is apparently not one of them.   

IMHO, the ADP report's main utility is not to investors, but rather as a PR score brought to its parent co. Other than that, it turns out to be just another piece of self-promotional random PR garbage.

What I found surprisingly revealing was the absurdist reaction to the ADP data prior to NFP by Wall Street. What in hell were those Economists thinking about? Why toss out a perfectly serviceable  model, and raise Payroll expectations -- merely based upon an ADP data point and its rather unimpressive track record?

Let's be brutally honest here:  ADP is a for-profit firm that processes payrolls for corporate  employers. From what I gather, they do that very well. But as an econometric firm, they are in way over their heads. (I am not familiar enough with Macroeconomic Advisers to opine on their complicity in all this). The data ADP has been releasing has served its purposes well: Its a nice little piece of publicity that generates exposure and cheap marketing for the firm. Indeed, if you go to the website that was set up for this report -- ADP Employment Report.com -- it looks much more like an advertisement:

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Adp_ner

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To me, this looks like marketing -- and not a serious bit of economic research.

But enough opinion. The Big Picture is about interpreting data, and for that we will go straight to the evidence: the actual data comparing BLS Non-Farm Payroll Reports with the ADP National Employment Report for 2006 (January through June):

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   Employment Report    ADP (forecast) 
   Private Sector Only 
  BLS (actual)   
All NFP
  Correlation 
January 2006 162k  154k 92.6%
February 2006 342k  200k 58.4%
March 2006 133k 175k 131.5%
April 2006 178k 126k 70.8%
May 2006 121k 75k 62.0%
June 2006 368k 121k 32.9%

>

Note that the BLS measures both private and government job creation, while ADP only measures private employers. That means the overestimates by ADP are off by an even bigger factor, while the underestimates are more accurate than they appear. The most recent miss is particularly huge -- 25% of June's new job creation was governmental. So the actual number of private sector BLS jobs was 90,000 versus the forecast of 368,000. That a miss of about 300%.

This is somewhat of an Apples and Oranges comparison, as the ADP measure does not include government (Federal, State and Local) employees. But since ADP is touting this as a forcast of the BLS data, it is incumbent upon them to make the appropriate adjustments -- not the reader.

Several other factors are likely contributors to the ADP forecasting errors:

• BLS sample is considerably larger, covering ~400 thousand establishments with total employment of ~45 million; ADP NER covers roughly a bit more than half as many establishments (226k) with about a thirds as many workers -- 14 million.

• BLS employs a Birth/death adjustment; ADP does npot attempt to measure new business creation, using their customer data. Ironically, this may make ADP even m roe inaccurate, as the Birth/Death adjustment has shown a strong upwards bias;

Bloomberg noted the gaffe in article Friday. Here's the most amusing line from their report on the ADP miss:

"Joel Prakken, chairman of the St. Louis-based forecasting firm Macroeconomic Advisers LLC, which produces the report jointly with ADP, couldn't immediately be reached for comment."

One of the committments I made to myself when I started speaking in public was to frequently say "I was wrong." I have spit out mea culpas on a regular basis.  As soon as I become "unavailable for comment" after being way wrong on something is when you should immeidately stop reading this blog.

Bottomline: As far as the ADP report being a legitimate data source, they are no better than other self promotional private reports announcements, like the Monster Jobs report or just about anything out of the Conference Board. All are transparent pieces of PR puffery. None has a methodology that is time tested or particularly valuable. Each methodology varies so much from the BLS process that it has almost zero value as a predictor of the actual NFP report.

The one exception seems to be the National Association of Realtors; At least they release their data, which seems to have some general value; of course, you can ignore most of what comes out of their chief economist for the same reasons.

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Sources:
ADP National Employment Report FAQ
http://www.adpemploymentreport.com/ner_faq.aspx

ADP Job Survey Loses Luster Among Economists After June Miss
Joe Richter
Bloomberg, July 7, 2006 15:09 EDT
http://tinyurl.com/oaamn

Bureau of Labor Statistics, (PDF)
BLS report, March 5, 2004
http://www.bls.gov/cps/ces_cps_trends.pdf

Monday, July 10, 2006 | 05:53 AM | Permalink | Comments (11) | TrackBack (0)
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"One of the committments I made to myself when I started speaking in public was to frequently say "I was wrong." I have spit out mea culpas on a regular basis. As soon as I become "unavailable for comment" after being way wrong on something is when you should immeidately stop reading this blog."

Thank you.

Posted by: Kevin | Jul 10, 2006 9:01:44 AM

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