ADP Sees Gain of 187,000 Jobs - Analyst Blog

The Automatic Data Processing (ADP) employment survey was better than expected in January. It shows that private sector employment rose by 187,000 in January, well above consensus expectations for a 145,000 increase. Of course, last month, ADP was way off the mark and reported a gain of 297,000 private sector jobs and the BLS only reported a gain of 113,000 from the private sector (and 103,000 total).

The December numbers were revised lower to a gain of 247,000 jobs, but that is still way above the BLS figure (unless the BLS numbers are revised sharply higher for December when the January numbers are reported on Friday. I think some upward revision is likely, but nothing close to that sort of magnitude).

ADP, as the largest payroll processing firm in the country, is in a very good position to look at the state of the job market. This is evidence of an economy that is not only growing, but accelerating very nicely. For most of 2010, the ADP report has consistently been more pessimistic than the BLS report, although that was not the case in November or December. If the ADP numbers were to be confirmed by the BLS, it is the sort of the level we need to make a dent in the vast army of the unemployed.

Results by Business Size 

Small businesses, defined as those with fewer than 50 employees, rose a total of 97,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 79,000 jobs while large firms, with 500 or more employees, added 11,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.548 million out of a total of 107.654 million private sector jobs in the country. Small business is the largest source of employment at 48.578 million, followed by medium businesses at 41.528 million.

Goods Producing

The goods-producing sector added a total of 21,000 jobs. Overall goods-producing industries are not that big a source of jobs in this country, just 17.507 million (16.3%) in total. Employment in goods-producing industries tends to be more volatile than in the service sector, and thus the goods producing industries have an outsized influence on the overall strength of the job market. Goods-producing jobs, particularly manufacturing jobs, have been in a secular decline, particularly as a share of total employment for more than 30 years now.

Relative to the overall increase, it looks like that trend is continuing. The goods producing sector is made up of Manufacturing, Construction and Mining. While construction jobs did increase during the housing bubble, those jobs were particularly hard hit in the Great Recession.

Construction

Construction industry employment was down by 1,000 in December. Construction jobs peaked well before overall employment in the country, in January 2007. Since then, employment has shrunk by a total of 2.311 million. That is more than one-fourth of the total jobs lost in the entire economy since the recession started.

Historically, construction employment (especially residential construction) is one of the first areas to recover when the economy starts to rebound, but that is not happening this time around. With the extraordinary weakness in new home sales in recent months, there is very little reason to believe in that construction employment is going to pick up anytime soon. High vacancy rates in most forms of commercial real estate also means that there is not going to be much of a pick up in commercial construction anytime soon.

Still just by not being a drag on the rest of the economy, things will start to look better overall. Eventually higher employment is going to lead to higher rates of household formation. That, combined with population growth, will increase the demand for housing and the massive inventory overhang we have now will be absorbed. That, however, is not a first half of 2011 story, but it could well start to occur late in 2011 or in 2012.

Manufacturing

Manufacturing had been a bright spot in this recovery, but it faltered in the fall. It looks like it is getting back on track with a gain of 19,000 jobs in January. There were 11.546 million manufacturing jobs in January, or just 10.7% of the overall private sector workforce. ADP does not break out mining jobs separately, but given the overall rise in goods producing jobs, we can surmise that the number of mining jobs was down 1,000 on the month.

Within the goods-producing sector, most of the gains came from the medium-sized firms which added 12,000 jobs. Large firms added 2,000 while the small goods-producing firms gained 7,000 jobs for the month.

Service Sector

The Service sector is far larger, accounting for 90.147 million jobs or 83.7% of the private sector total.  It added 166,000 jobs in January.  Of those, 90,000 were added by small service firms, while medium sized firms added 67,000 and large service firms gained 9,000. Far more people are employed by small service firms, (42.213 million) than by either medium-sized firms (33.825 million) or by large sized firms (14.109 million).

Government Jobs Not Accounted For

The ADP report only covers private sector employment, not government jobs at any level. The ADP report has also been consistently more downbeat than the official BLS numbers for most of 2010, but was far too optimistic in December. The two series do tend to move in the same direction, and tend to be closer once all of the revisions are in.

The consensus is looking for a gain of 148,000 jobs on Friday, with more than all of the gains coming from the private sector. The consensus is looking for a loss of 15,000 government jobs, mostly at the State and Local levels. The apples-to-apples private sector expectations are for a gain of 163,000 jobs on Friday.

Earlier in 2010, the government job totals were first greatly inflated, but then depressed by the hiring and then laying off of the Census workers. That is no longer a factor. State and Local governments have been under severe fiscal strain and are likely to be laying off people. Look for that trend to continue and probably accelerate given the political changes in November.

The new GOP majority in the House is going to be less inclined to provide financial assistance to the State and Local governments. After all, such aid made up about one quarter of the ARRA or stimulus plan that they criticized in the election. Since States are legally not allowed to run operating deficits they either have to raise taxes or cut spending. Raising taxes is less politically popular right now than cutting spending.

For the most part, cutting spending at the State and Local level will mean laying people off. The State and Local cutbacks are a major source of “de-stimulus” that offsets the stimulus from the ARRA on the Federal side. From the point of view of the overall economy and aggregate demand, it really doesn't matter if the spending is coming from the Federal Government or the State government. (It does matter on a couple of other levels, but not in terms of total demand in the economy.)

Thus, the total amount of stimulus in the economy is much less than is commonly believed. Even so, there is going to be a lot less of it going forward than we have had over the last two years. On the other hand, if private sector employment is starting to pick up -- and this report clearly points in that direction -- then overall incomes will rise, and those States with income taxes will see revenues start to rebound.

Assuming people start to spend more when they have jobs, then sales taxes will also rise. The third major source of State and Local revenues, property taxes, are still likely to be strained as housing prices are likely to continue to fall for most of 2011, and that will result in lower assessed values, and hence lower property tax revenues.

Overall: Encouraging

This was an encouraging report, but my enthusiasm is tempered by the big miss last time around. The job gains appear to be widespread, with participation by both the goods producing and service sides of the economy, and all sizes of business participating.

This is the sort of job growth that should actually bring down the unemployment rate. It is not going to be a one-for-one sort of thing, since as people see more jobs being added to the economy, the labor force participation rate is likely to start to rebound.  Roughly half of the decline in the unemployment rate in December came from a falling participation rate. And if the economy is really starting to turn around, the participation rate is unlikely to continue to fall, and is more likely to rebound.

Given the other data we have seen of late, it seems as if job creation should be getting back on track, although the rough weather is not helping. When the big report comes out on Friday, look at the revisions to the December and November numbers. In recent months, the revisions have been running large and positive.

If this report is confirmed by the BLS numbers, a gain of 187,000 jobs is certainly respectable, and would be a very strong number if we were not in such a deep hole. In the last jobs recovery, starting in September of 2003 and running through December 2007, on average the economy added just 156,000 jobs per month, and 141,000 private sector jobs. That is only counting the “good” parts of the Bush Presidency. Since this jobs recovery started in December 2009, we have only been averaging 107,000 new private sector, and 130,000 total new jobs per month, so a private sector total of 187,000 would represent a substantial acceleration.

On the other hand, total employment in December was still 7.29 million below the December 2007 peak (and private sector jobs were 7.12 million lower). At a rate of 187,000 new jobs a month, it would take 38 more months from here before we passed the prior employment peak -- in other words, March of 2014. Add in a growing population and workforce, and bringing down unemployment to what we thought of as normal before the Great Recession appears to be a glacial process at best.

The graph below shows the path of employment, both total and private sector over the last ten years.

 
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