The Automatic Data Processing (ADP) employment survey was a big disappointment in August. It shows that private sector employment fell by 10,000 in August, well below consensus expectations for a 13,000 increase. This was the first decline in jobs as calculated by ADP this year.
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. In addition, July’s job gains were revised down to 37,000 from 42,000. This is more evidence of the slowdown in the economy over the last few months, as the inventory cycle is largely over and the federal stimulus spending begins to fade.
Job Gains/Losses by Company Size
Small businesses, defined as those with fewer than 50 employees, dropped a total of 6,000 jobs in the month. Medium sized firms, those with between 50 and 499 employees, lost 5,000 jobs while large firms with 500 or more, employees added just 1,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.504 million out of a total of 106.956 million private sector jobs in the country. Small businesses are the largest source of employment at 48.247 million; medium businesses have 41.205 million jobs.
Goods Producing Not Delivering the Goods
All of the jobs lost were from the goods producing sector, which lost a total of 40,000 jobs. Overall, goods producing industries are not that big a source of jobs in this country, just 17.477 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.
Worst hit in the goods producing sector were the small firms which shed 21,000 workers, followed by a loss of 12,000 among the medium-sized firms while the large goods producing firms dropped 7,000 workers in the month. The goods producing sector is made up of Manufacturing, Construction and Mining.
It appears that all three areas dropped jobs in the month, with the construction industry again bearing the brunt of the pain, on balance issuing 33,000 more pink slips in the month. The construction industry has been shedding jobs since January 2007, and over that period has shrunk employment by a total of 2.275 million.
Historically, construction employment 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 any time 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.
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 in August factory jobs fell for the second month in a row, falling by 6,000 on top of a decline of 11,000 in July. It now appears that much of the gains in manufacturing employment were due to inventory restocking, which is now largely complete.
ADP does not break out mining jobs separately, but given the overall decline in goods producing jobs and the drops in construction and manufacturing, we can surmise that there were 1,000 fewer miners working in August than in July.
The disparity in the goods producing sector between small and large sized firms is probably related to the differences between construction and manufacturing. There are lots and lots of small construction firms. Most of the major homebuilders like D.R. Horton (DHI) outsource most of their work to smaller subcontractors, and do not directly hire or fire lots of framers and roofers. Manufacturing, on the other hand, tends to be more dominated by the big household names like Ford (F) and Caterpillar (CAT). The parts they use tend to be mostly made by medium-sized firms.
Service Sector Tallies
The service sector is far larger, accounting for 89.479 million jobs or 83.7% of the private sector total. It added 30,000 jobs in August. Of those, 15,000 were added by small service firms, 7,000 by medium sized firms and 8,000 by large firms. However, far more people are employed by small service firms (41.876 million) than by either medium-sized firms (33.552 million) or by large-sized firms (14.051 million). Thus relative to the size of overall employment, large-sized service firms were doing a better job at adding jobs than were small-sized firms (0.057% vs. 0.036%).
Limitations of ADP Report
The ADP report only covers private sector employment, not government jobs at any level. With private sector employment negative (at least as computed by ADP; their numbers and the official Bureau of Labor Statistics numbers do not always line up exactly, but tend to be in the same general ballpark and move in the same direction), it is a virtual certainty that we will see a negative headline number on total jobs when the BLS numbers come out on Friday morning.
The Federal Government is not through laying off Census workers, and that alone will likely depress total employment in August by 115,000 workers or so. The good news is that August should be the last month of mass Census layoffs. State and local governments have been under severe fiscal strain and are likely to be laying off people as well.
State & Local Difficulties
The recent passage of state aid bill by Congress will help reduce the magnitude of those cuts from what they would have otherwise been, particularly when it comes to teachers, but it did not come close to filling the overall hole in the state and local government budgets. Since they 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.
Hurricane Earl is not going to be the only potential source of stormy weather on Wall Street on Friday.
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Market News and Data brought to you by Benzinga APIsADP, as the largest payroll processing firm in the country, is in a very good position to look at the state of the job market. In addition, July’s job gains were revised down to 37,000 from 42,000. This is more evidence of the slowdown in the economy over the last few months, as the inventory cycle is largely over and the federal stimulus spending begins to fade.
Job Gains/Losses by Company Size
Small businesses, defined as those with fewer than 50 employees, dropped a total of 6,000 jobs in the month. Medium sized firms, those with between 50 and 499 employees, lost 5,000 jobs while large firms with 500 or more, employees added just 1,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.504 million out of a total of 106.956 million private sector jobs in the country. Small businesses are the largest source of employment at 48.247 million; medium businesses have 41.205 million jobs.
Goods Producing Not Delivering the Goods
All of the jobs lost were from the goods producing sector, which lost a total of 40,000 jobs. Overall, goods producing industries are not that big a source of jobs in this country, just 17.477 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.
Worst hit in the goods producing sector were the small firms which shed 21,000 workers, followed by a loss of 12,000 among the medium-sized firms while the large goods producing firms dropped 7,000 workers in the month. The goods producing sector is made up of Manufacturing, Construction and Mining.
It appears that all three areas dropped jobs in the month, with the construction industry again bearing the brunt of the pain, on balance issuing 33,000 more pink slips in the month. The construction industry has been shedding jobs since January 2007, and over that period has shrunk employment by a total of 2.275 million.
Historically, construction employment 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 any time 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.
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 in August factory jobs fell for the second month in a row, falling by 6,000 on top of a decline of 11,000 in July. It now appears that much of the gains in manufacturing employment were due to inventory restocking, which is now largely complete.
ADP does not break out mining jobs separately, but given the overall decline in goods producing jobs and the drops in construction and manufacturing, we can surmise that there were 1,000 fewer miners working in August than in July.
The disparity in the goods producing sector between small and large sized firms is probably related to the differences between construction and manufacturing. There are lots and lots of small construction firms. Most of the major homebuilders like D.R. Horton (DHI) outsource most of their work to smaller subcontractors, and do not directly hire or fire lots of framers and roofers. Manufacturing, on the other hand, tends to be more dominated by the big household names like Ford (F) and Caterpillar (CAT). The parts they use tend to be mostly made by medium-sized firms.
Service Sector Tallies
The service sector is far larger, accounting for 89.479 million jobs or 83.7% of the private sector total. It added 30,000 jobs in August. Of those, 15,000 were added by small service firms, 7,000 by medium sized firms and 8,000 by large firms. However, far more people are employed by small service firms (41.876 million) than by either medium-sized firms (33.552 million) or by large-sized firms (14.051 million). Thus relative to the size of overall employment, large-sized service firms were doing a better job at adding jobs than were small-sized firms (0.057% vs. 0.036%).
Limitations of ADP Report
The ADP report only covers private sector employment, not government jobs at any level. With private sector employment negative (at least as computed by ADP; their numbers and the official Bureau of Labor Statistics numbers do not always line up exactly, but tend to be in the same general ballpark and move in the same direction), it is a virtual certainty that we will see a negative headline number on total jobs when the BLS numbers come out on Friday morning.
The Federal Government is not through laying off Census workers, and that alone will likely depress total employment in August by 115,000 workers or so. The good news is that August should be the last month of mass Census layoffs. State and local governments have been under severe fiscal strain and are likely to be laying off people as well.
State & Local Difficulties
The recent passage of state aid bill by Congress will help reduce the magnitude of those cuts from what they would have otherwise been, particularly when it comes to teachers, but it did not come close to filling the overall hole in the state and local government budgets. Since they 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.
Hurricane Earl is not going to be the only potential source of stormy weather on Wall Street on Friday.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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AUTOMATIC DATA (ADP): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis Report
D R HORTON INC (DHI): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
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