ADP released their monthly employment report this morning that can in a bit weaker than expected.   Before we get into the report it is important to remember that with the ADP report an individual only had to work ONE hour within the given reporting period to be counted as employed.   The month of January showed an increase of 170,000 new jobs versus expectations of 182,000.  However, what was surprising in the report was the downward revision of last months stellar 325,000 job increase to just 292,000. 

The January report, which is likely to be revised lower in the March release, was the lowest number since this past October.  This is relevant because that bounce in employment came post the economic malaise of the Japanese earthquake and summer debt ceiling/downgrade showdown. However, here is what is important as it relates to Friday's expected BLS employment situation report.  As you can see by the chart above there is a fairly high correlation between the monthly net change in employment between the ADP report and the BLS report that we will see on Friday.  The 122,000 job decline between Decembers revised number and January's release signals that we could very likely see a similar decline in job creation in Friday's BLS report.  The question is by how much?

My friend Tyler Durden at ZeroHedge pointed out this very interesting bit of data:

"Stone & McCarthy (SMRA) point out a disturbing trend of sizable forecasting errors for the January payroll print with 7 straight years of estimates overshooting by an average of 64k - strangely consistent post the BLS switch to a probability-based sample. But its not just forecasting error, TrimTabs takes a deep dive into the actual daily income tax deposits from all salaried employees (which are historically more accurate than BLS initial estimates) sees the US economy added only 45,000 jobs in January, nearly unchanged from the 38,000 in December. Noting similar forecasting errors as SMRA, TrimTabs points out that the decline in seasonal adjustment factors and the reality of the underlying tax data suggest. 'It appears that the economy has hit stall speed due to lackluster demand and a deleveraging consumer who would rather save than spend.' as wage and salary growth (net of inflation) weakened further to -2.1% YoY in January from -0.5% YoY in December. 'The weak job market has us concerned' seems like a truer reality than the establishment trying to keep the dream alive.

"The weak job growth in January has us concerned," says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs.  "It appears that the economy has hit stall speed due to lackluster demand and a deleveraging consumer who would rather save than spend."

"We see nothing on the horizon to knock the economy out of its slow growth mode," notes Schnapp.  "The economy faces substantial headwinds from negative real wage and salary growth, high unemployment, waning government support, expiring tax incentives, contracting state and local governments, elevated fuel prices, and a sluggish housing market."

There is little in those comments with which we could disagree. Therefore, with this in mind, considering that the average analyst estimate for Friday's BLS job report is +145,000 we could likely see a number closer to 90,000 if we factor in the historical overshoot in estimates.  A reading this low would likely surprise most market participants and send Steve Liesman into a meltdown right on CNBC. 

For investors the concern is much more real.  The markets continue levitating on thin air as the vacuum of European news continues to persist.  Extremely light trading volume and a huge drop in short interest have elevated the risk of a correction in recent days.  A correction, as we have stated, does not negate our recent "buy" signals in our newsletter but simply provides a better opportunity to add short term exposure AS LONG AS support is not broken and the recent bullish trend is not reversed.  Longer term we remain in a volatile secular bear market where advances will be met with counter trend declines.  For individuals it will remain a difficult market for "buy and hold" investment strategies as volatility will likely push individuals into emotional decisions that lead to longer term underperformance.  This remains a market that will require more proactive risk management into the foreseeable future.

On Friday we will release our updated "Real Employment Situation Report For January" where we will dig down into the employment numbers and look at what is really going on in the American economy and the slowest economic recovery on record.