Interesting Divergence Between ADP and Establishment Survey

The following chart compares ADP's version of employment (in blue) with the government's establishment survey version (in red, minus government jobs).


Click to enlarge.

There is a clear divergence lately. Let's take a closer look.


Click to enlarge.

I haven't been following this divergence long enough to form a theory on why it is there, and without that it is difficult to offer useful commentary. Won't stop me from trying though! Here are two potential reasons off the top of my head.

1. The divergence is always there but it gets revised away over time (the older data is corrected). If that's the case, no big deal.

2. The divergence is valid and the establishment survey is coming down to close the gap. There was a weak establishment report in December and, as seen in the chart, that certainly closed the gap to some degree.

In any event, I would suggest that there is headline risk for tomorrow's employment report. If the gap closes more, then the report will disappoint.

Here's the most optimistic thing I've said on this blog in a long time. If the report is much weaker than expected (big if) and if everyone points out how exceedingly weak the report therefore is, then I would say that they may be overreacting. It might just be a correction to close a divergence and little more. It's not like the ADP report itself looks all that awful (not great either for that matter).

That said, no single straw on a camel's back thinks it is responsible for the collapse. Things could get ugly. Real ugly. Perhaps all it takes is an illusionary straw to break the camel's illusionary prosperity? Who can say for sure?

This is definitely not investment advice, nor is it a prediction of any sort. I can say that I have never been more interested in a government payroll report though. Never.

Source Data:
St. Louis Fed: Custom Chart