Automatic Data Processing (ADP) reported that in March the economy lost 23,000 private sector jobs. ADP is generally in a good position to know since it is by far the largest payroll processing firm in the country.

This report is the most important precursor to the big jobs report from the Bureau of Labor Statistics, due out on Friday. The consensus expectation was that the ADP report would show a net gain of 40,000 jobs, and that expectation had been rising in recent days.

While this is the smallest decline since February of 2008, this is only because the February numbers were revised to show a loss of 24,000 rather than the originally reported 20,000 jobs lost. The losses were concentrated in the goods-producing side of the economy, which is much smaller — but more volatile — than the service side of the economy. The goods-producing sector lost 51,000 jobs during the month, while the service sector gained 28,000 jobs. Within the goods producing sector, it looks like most of the losses were concentrated in Construction, since Manufacturing lost only 9,000 jobs.

How much larger is the Service sector than the Goods Producing sector? More than five times as big, employing 89.146 million in March versus only 17.554 million in the goods-producing sector (Manufacturing, Mining and Construction).

Breakdown by Size of Firm

By size of firm, most of the jobs were lost by small businesses (under 50 employees), which shed 12,000 jobs. Mid-sized business (50-499 employees) fared the best with a loss of only 4,000 jobs, while large businesses (500+) lost a total of 7,000 jobs. The Service-versus-Goods split was apparent at all business size levels.

Small service businesses actually added 15,000 jobs, but that was more than offset by a loss of 27,000 small-firm goods-producing jobs. That is not a very big part of the economy to begin with — only 6.454 million in March. That means that we lost 0.42% of all jobs in the sector in the month.  It sure doesn’t feel like much of a recovery if you are working at a small goods-producing firm.

While it is not broken down at that level, I suspect that most of those job losses were in the Construction field, which would fit with the extremely low level of housing starts and new home sales (an all-time record low in February, breaking the January record, with data going back to 1963).

Among mid-sized firms, the goods-producing side lost 14,000 jobs while the service side gained 10,000 jobs. Among large firms, 10,000 goods-producing jobs were lost, while 3,000 service jobs were gained. The large goods-producing sector is very small in terms of over all jobs. (It has been a long time since the typical American worker was on the factory floor of a major manufacturer like Ford [F] or General Electric [GE]).  Thus the percentage loss among large goods-producing firms was almost as high as among small goods producers, at 0.29%.

The strength of the service sector and the weakness in the goods-producing sector seems in direct contrast to the Institute for Supply Management (ISM) numbers, which have recently been showing far more strength on the manufacturing side than on the non-manufacturing (service) side of things. The ISM manufacturing data for March are due out later today, and the service numbers are due out next week.  It will be interesting to see if they confirm the ADP data or continue to contradict it.

Construction & Housing

Normally, Construction is an area that helps lead us out of recessions, mostly on the residential side (commercial real estate construction typically lags the overall economy, holding up well early in downturns, and only recovering well after the rest of the economy is solidly on its feet, mostly due to the long lead times involved). The massive overhang of too many houses built during the bubble continues to weigh on the economy.

With a big inventory of existing homes on the market (and huge if one figures in the shadow inventory of people far behind on their mortgages, or already in the process of foreclosure, meaning that those houses will eventually be coming onto the market), there simply is not that big a need to build more houses. This is particularly true while the rate of household formation is very depressed. “Household formation” is essentially economist-speak for this little play:

DAD: Junior, it’s time to get you butt out of Mom and Dad’s basement and into your own place. 
JUNIOR: But Dad, how am I supposed to get my own place when I don’t have a job?
DAD: Well you might have been a screw up in school, but you can still swing a hammer, can’t you?
JUNIOR: Yeah, but since nobody is moving out, they aren’t building any homes anymore.
Dad: OK, you can stay, but you have to start helping out around the house more.

It’s not that Junior directly was going to go out and buy a brand new home, but he is sort of at the bottom of the food chain. Kind of like all the fish in the sea ultimately depend on the tiny plankton. As a result, Junior does not move out, and the rental vacancy rate stays high.

This puts downward pressure on rents, meaning that some of the people who might have moved out of apartments decide to stay and not buy that starter fixer-upper, which means that the owners of that house can’t move up to the nice three-bed, 2.5 bath across town where the schools are a bit better, which means that that family is not going to move out and have their dream home built for them.

Also, if Junior had been able to get that job building houses, he would be spending what he earned to furnish his new place, and that creates jobs for the retailers and for those who make and transport the stuff that would go into his new apartment. Those people, in turn, might be people who then feel secure enough to move into a place of their own. Maybe they are not with Mom and Dad, they might be sharing an apartment with three other roommates to save money, but with a bit more income would opt for more space and privacy. That too would provide more plankton for the housing food chain.

Housing Will Come Back…Eventually

We are in the process of creating a lot of pent-up demand for housing, and eventually it will turn. However, we had pre-satisfied so much of it during the bubble that it is hard to get the process jump-started again. In the past, this was done by the Fed lowering interest rates, which caused mortgage rates to drop and made houses more affordable. This would kick-start the economy.

However, mortgage rates are already at historic lows, and housing sales — both new and used — are extremely anemic. It looks like the housing market has stabilized a bit in terms of the price of existing homes.

The Case-Schiller data yesterday was moderately encouraging on that front. That is a useful first step in the process (and is good news on a number of other levels). At a very minimum, the price of a new house has to be more than the cost of the land, materials and labor that go into building it. Used houses are generally extremely good substitutes for new homes. If the prices of existing houses are plunging, there is not much reason to turn that next cornfield into a subdivision.

Very Disappointing Report

Overall this was a very disappointing report. The expectations for the Friday jobs report are very high, with a gain of 190,000 jobs expected.

There is a bit of a difference in how ADP collects its data and how the BLS does, and ADP claims that its method was not impacted by the snow storms in February, hence no need for a snap back. Also, the ADP numbers are for the private sector only. One of the biggest contributors to the very high expectations for the BLS number on Friday is all the workers the government is expected to hire for the Census.

Thus there is not a direct contradiction between the ADP numbers and the expectations for the BLS number. However, I think this report will help to temper those expectations a bit. Those Census jobs are better than people being unemployed, but they are only going to last about six months, meaning that we will probably see a big decline in employment in the fall. I’m not sure if jobs that last only that long (and people know that they will only last that long) will be enough to kick-start the housing cycle, but they might be enough to help create other jobs as the Census workers spend their paychecks.

In other words, there will only be a moderate multiplier effect from the Census jobs — some, but not nearly as many as if the jobs had been permanent, or at least longer lasting. Also, those jobs will effectively be deficit financed, but then again, so were the extended unemployment benefits that many of them had been getting.
Read the full analyst report on “ADP”
Read the full analyst report on “F”
Read the full analyst report on “GE”
Zacks Investment Research