Thursday, December 3, 2009

Is the Job Picture Improving?

Yesterday, the ADP National Employment report, named so because it was created by Automatic Data Processing, measured employment as falling by 169,000 jobs from October to November, on a seasonally adjusted basis. ADP’s report is considered to be a good gauge of what to expect from the Bureau of Labor Statistics’ (BLS) employment report, which is released two days later. November’s drop in the ADP report was the 23rd straight month in which the economy shed jobs; however, it was also the 8th straight month in which jobs cuts were less than the previous month (the low for the series was in March of 2009 with a decline of 736,000). Below is a chart of the monthly change in ADP employment, with the 0 level marked by the red line.

There are two lines of thinking when viewing this chart and job losses. The first would be the bullish case that employment is a lagging indicator, so the recent progress proves that the economy has been improving since the March lows, and very soon the report may show the economy actually gained jobs (many analysts believe that may occur by February 2010). The second line of thinking is the bear case and focuses on the other side of the labor market – hiring. From their point of view, this has been the mother of all jobless recoveries and business hiring has still not shown signs of improvement.

It will be interesting to see how the market reacts to the BLS data tomorrow. If we get a better than expected number (125,000 job losses are expected), then the bull case of improving economic conditions could finally push the S&P 500 above the 1,100 to 1,115 range it has been in for the last two weeks. If the number disappoints, however, it could serve as the catalyst to drive an overbought market lower.