The Automatic Data Processing (ADP) employment survey was much better than expected in November. It shows that private sector employment rose by 93,000 in October, above consensus expectations for a 58,000 increase. Also, the October numbers were revised to a gain of 82,000 jobs rather than the original estimate of a gain of 43,000 jobs.
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 growing, but still slow pace, but starting to accelerate. While it is nice to see a better than expected increase, and so far this year the ADP report has consistently been more pessimistic than the BLS report (due out Friday morning), it is not even close to the level we need to make a serious dent in the vast army of the unemployed.
Small businesses, defined as those with fewer than 50 employees rose a total of 54,000 jobs in the month. Medium sized firms, those with between 50 and 499 employees, gained 37,000 jobs while large firms with 500 or more employees gained just 2,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.512 million out of a total of 107.219 million private sector jobs in the country. Small business is the largest source of employment at 48.391 million, followed by medium businesses at 41.316 million.
Goods-Producing Produces Jobs
Jobs were gained from the goods producing sector, which rose a total of 14,000 jobs. Overall goods producing industries are not that big a source of jobs in this country, just 17.464 million (16.29%) 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.
Small goods producing firms added 5,000 workers, more than offsetting a loss of 4,000 jobs among large goods producing firms. The bulk of the gains were in medium sized firms, which added 13,000 jobs. The goods producing sector is made up of Manufacturing, Construction and Mining.
Construction Not Constructing
The Construction industry was again weak, on balance issuing 3,000 more pink slips in the month. However, that is the smallest loss of construction jobs since June 2007. The Construction industry has been shedding jobs since January 2007 and over that period has shrunk employment by a total of 2.304 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 any time soon.
One confirmation of that is the billing index from the American Institute of Architects, which has been below 50 since January 2008, indicating falling work for architects. Commercial construction almost always needs an architect, and there is about a nine month to a year lag between when the architects send out their bills and when construction spending (and hence employment) happens.
Manufacturing had been a bright spot in this recovery, but has faltered this Fall. It turned positive again in November with the addition of 16,000 jobs. In October, factory jobs fell by 5,000 (revised from a drop of 12,000). ADP does not break out mining jobs separately, but given the overall increase in goods producing jobs, the drop in Construction and the gain in Manufacturing, we can surmise that the number of mining jobs was up 1,000 on the month.
Service Sector Services
The Service sector is far larger, accounting for 89.755 million jobs or 83.71% of the private sector total. It added 79,000 jobs in September. Of those, 49,000 were added by small service firms, while medium-sized firms added 24,000, and large service firms gained 6,000. Far more people are employed by small service firms (42.024 million) than by either medium-sized firms (33.648 million) or by large-sized firms (14.083 million).
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 so far this year, but the two series do tend to move in the same direction. The consensus is looking for a gain of 130,000 jobs on Friday, with all of the gains coming from the private sector, and government employment falling 10,000, for a private sctor total of 140,000.
Look for BLS to Be Higher
Given the recent relationship between the ADP numbers and the BLS numbers, don't be shocked if the BLS shows an increase in private sector jobs of about 165,000 or so. That would be a nice positive surprise, but still not enough to make a serious dent in the unemployment rate, particularly if the participation rate starts to rise. The Federal government is through laying off Census workers, so they will no longer be a factor. State and Local governments have been under severe fiscal strain, however, and are likely to be laying off people.
No Federal Support Expected
The new GOP majority in the House is going to be less inclined to provide financial assistance to the State and Local (S&L) governments. After all, such aid made up about one third of the ARRA or stimulus plan, that they criticized in the election.
Since S&L 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.
In Summation: Encouraging
This was an encouraging report. We need to be adding large numbers of private sector jobs, and 93,000 a month is not enough, but at least is getting into the right area code of where we need to be.
The key problem remains in the Construction sector, and that is not likely to turn around until the housing situation is resolved. As long as there is a big inventory overhang of existing homes, there is no real reason to build more new homes. People who are far behind in their mortgage payments are likely to lose their houses to foreclosure, and those houses will come on to the market at depressed prices, which will make it hard for the homebuilders to compete.
Those homes are not included in the inventory of existing homes for sale, and still there were 10.5 months worth of supply on the market in October at the current sales rate for existing homes. That was roughly the same months of supply we saw during the 2007-08 plunge in housing prices.
When construction workers go back to work, they start to spend on other things, thus stimulating employment in other parts of the economy. New home building provides jobs not only from the homebuilders like D.R. Horton (DHI) and the direct subcontractors, but also jobs in other parts of the economy as well, such as lumberjacks and demand for lumber from Plum Creek Timber (PCL) rises, and demand for plumbing fixtures from Masco (MAS) increases.
Well, at least historically that is how we have tended to come out of recessions. That just is not happening this time around. If the traditional way of getting the economy going is not going to work due to the collapse of the housing bubble, we need to find an alternative.
The best available alternative in my mind would be additional federal spending, particularly on infrastructure projects. Those jobs require much of the same skillsets needed for housing construction jobs. Yes, the deficit is a long-term problem, but we should not let that deter us from using more stimulus to get the economy going. After all, there is no way that we will get the long-term budget deficit problem under control if we have unemployment stuck near double digits for the foreseeable future.
People working equals people paying income and payroll taxes. Besides, it is not like there is a shortage of worthwhile projects in restoring the country's increasingly dilapidated infrastructure. Unfortunately, we are likely to see cuts in such spending going forward, not increases.
AUTOMATIC DATA (ADP): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
PLUM CREEK TMBR (PCL): Free Stock Analysis Report
Zacks Investment Research
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Small businesses, defined as those with fewer than 50 employees rose a total of 54,000 jobs in the month. Medium sized firms, those with between 50 and 499 employees, gained 37,000 jobs while large firms with 500 or more employees gained just 2,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.512 million out of a total of 107.219 million private sector jobs in the country. Small business is the largest source of employment at 48.391 million, followed by medium businesses at 41.316 million.
Goods-Producing Produces Jobs
Jobs were gained from the goods producing sector, which rose a total of 14,000 jobs. Overall goods producing industries are not that big a source of jobs in this country, just 17.464 million (16.29%) 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.
Small goods producing firms added 5,000 workers, more than offsetting a loss of 4,000 jobs among large goods producing firms. The bulk of the gains were in medium sized firms, which added 13,000 jobs. The goods producing sector is made up of Manufacturing, Construction and Mining.
Construction Not Constructing
The Construction industry was again weak, on balance issuing 3,000 more pink slips in the month. However, that is the smallest loss of construction jobs since June 2007. The Construction industry has been shedding jobs since January 2007 and over that period has shrunk employment by a total of 2.304 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 any time soon.
One confirmation of that is the billing index from the American Institute of Architects, which has been below 50 since January 2008, indicating falling work for architects. Commercial construction almost always needs an architect, and there is about a nine month to a year lag between when the architects send out their bills and when construction spending (and hence employment) happens.
Manufacturing had been a bright spot in this recovery, but has faltered this Fall. It turned positive again in November with the addition of 16,000 jobs. In October, factory jobs fell by 5,000 (revised from a drop of 12,000). ADP does not break out mining jobs separately, but given the overall increase in goods producing jobs, the drop in Construction and the gain in Manufacturing, we can surmise that the number of mining jobs was up 1,000 on the month.
Service Sector Services
The Service sector is far larger, accounting for 89.755 million jobs or 83.71% of the private sector total. It added 79,000 jobs in September. Of those, 49,000 were added by small service firms, while medium-sized firms added 24,000, and large service firms gained 6,000. Far more people are employed by small service firms (42.024 million) than by either medium-sized firms (33.648 million) or by large-sized firms (14.083 million).
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 so far this year, but the two series do tend to move in the same direction. The consensus is looking for a gain of 130,000 jobs on Friday, with all of the gains coming from the private sector, and government employment falling 10,000, for a private sctor total of 140,000.
Look for BLS to Be Higher
Given the recent relationship between the ADP numbers and the BLS numbers, don't be shocked if the BLS shows an increase in private sector jobs of about 165,000 or so. That would be a nice positive surprise, but still not enough to make a serious dent in the unemployment rate, particularly if the participation rate starts to rise. The Federal government is through laying off Census workers, so they will no longer be a factor. State and Local governments have been under severe fiscal strain, however, and are likely to be laying off people.
No Federal Support Expected
The new GOP majority in the House is going to be less inclined to provide financial assistance to the State and Local (S&L) governments. After all, such aid made up about one third of the ARRA or stimulus plan, that they criticized in the election.
Since S&L 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.
In Summation: Encouraging
This was an encouraging report. We need to be adding large numbers of private sector jobs, and 93,000 a month is not enough, but at least is getting into the right area code of where we need to be.
The key problem remains in the Construction sector, and that is not likely to turn around until the housing situation is resolved. As long as there is a big inventory overhang of existing homes, there is no real reason to build more new homes. People who are far behind in their mortgage payments are likely to lose their houses to foreclosure, and those houses will come on to the market at depressed prices, which will make it hard for the homebuilders to compete.
Those homes are not included in the inventory of existing homes for sale, and still there were 10.5 months worth of supply on the market in October at the current sales rate for existing homes. That was roughly the same months of supply we saw during the 2007-08 plunge in housing prices.
When construction workers go back to work, they start to spend on other things, thus stimulating employment in other parts of the economy. New home building provides jobs not only from the homebuilders like D.R. Horton (DHI) and the direct subcontractors, but also jobs in other parts of the economy as well, such as lumberjacks and demand for lumber from Plum Creek Timber (PCL) rises, and demand for plumbing fixtures from Masco (MAS) increases.
Well, at least historically that is how we have tended to come out of recessions. That just is not happening this time around. If the traditional way of getting the economy going is not going to work due to the collapse of the housing bubble, we need to find an alternative.
The best available alternative in my mind would be additional federal spending, particularly on infrastructure projects. Those jobs require much of the same skillsets needed for housing construction jobs. Yes, the deficit is a long-term problem, but we should not let that deter us from using more stimulus to get the economy going. After all, there is no way that we will get the long-term budget deficit problem under control if we have unemployment stuck near double digits for the foreseeable future.
People working equals people paying income and payroll taxes. Besides, it is not like there is a shortage of worthwhile projects in restoring the country's increasingly dilapidated infrastructure. Unfortunately, we are likely to see cuts in such spending going forward, not increases.
AUTOMATIC DATA (ADP): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
MASCO (MAS): Free Stock Analysis Report
PLUM CREEK TMBR (PCL): Free Stock Analysis Report
Zacks Investment Research
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