U.S. ADP Report Shows Record Job Gains in December; Initial Jobless Claim Declined for the Week Ending December 31

• In December, US private employment rose 325,000, which was well above market expectations for a 178,000 reading and following a revised 204,000 (was 206,000) gain in November, according to the ADP report.
• The increase in ADP employment marked the largest gain in the history of the survey; however, at least part of the gain may have been related to difficulties seasonally adjusting the ADP data at year end.
• Initial claims dropped 15,000 to 372,000 in the week ending December 31, 2011, thereby reversing much of the 21,000 jump to a revised 387,000 (was 381,000) level the previous week.
• The four-week moving average of initial claims, which better controls for weekly volatility, fell for a fifth consecutive week, dropping to 373,250 from a revised 376,500 (was 375,000) level the previous week to mark the lowest level since June 2008.

ADP private employment rose 325,000 in December, above a revised 204,000 (previously was 206,000) reading in November. The gain in December marked the largest increase in the history of the survey and was well above market expectations for a smaller 178,000 gain. Service-sector jobs accounted for 273,000 of the total increase in December with goods-producing sectors up 52,000. While encouraging, the ADP data for the month of December are notoriously volatile due to the fact that, unlike in the official BLS employment report (to be released tomorrow), employees of ADP's clients typically remain on payroll records until December whether still employed or not with those no longer employed subsequently removed from the records at the end of the year. Difficulties adjusting for this sizeable seasonal movement have the potential to distort the December ADP employment numbers.

The outsized employment gain in the today's ADP report could suggest some upside risk to our call for private employment to increase by 137,000 in tomorrow's official December BLS payroll report (and our call for a headline increase of 120,000); however, it is worth noting that the ADP data are notoriously difficult to adjust seasonally in December, owing to differences in the way that ADP and the BLS collect their data. As well, even without this year-end distortion, the ADP report has a spotty record at predicting monthly BLS payroll employment changes. With that said, the data, along with the continued downtrend in initial claims, are still consistent with our view that labour markets are continuing to improve although likely at a more modest pace than is implied by today's December ADP report.

In another report out this morning, initial unemployment insurance claims fell 15,000 to 372,000 in the week ending December 31, 2011, thereby retracing much of a 21,000 rise to a revised 387,000 reading (initially reported as 381,000) the previous week. The level of claims was slightly below market expectations for a decline to 375,000. The four-week moving average of initial claims, which better controls for weekly volatility, declined for a fifth consecutive week, falling to 373,250 from 376,500 (previously was 375,000) the previous week and marking the lowest reading since June 2008. Continuing claims (for the week ending December 24, 2011) fell 22,000 to 3,595,000.