The Automatic Data Processing (ADP) employment survey was a big disappointment in September. It shows that private sector employment fell by 39,000 in that month, well below consensus expectations for an 18,000-job increase.
This was the first decline in jobs as calculated by ADP this year…sort of. August’s numbers were revised from a loss of 10,000 jobs to a gain of 10,000. 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 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.
Small businesses, defined as those with fewer than 50 employees, dropped a total of 14,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, lost 14,000 jobs, while large firms with 500 or more employees dropped 11,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.495 million out of a total of 106.949 million private sector jobs in the country. Small business is the largest source of employment at 48.249 million, followed by medium businesses at 41.205 million.
The Culprit: Goods Producing
All of the jobs lost were from the goods producing sector, which lost a total of 45,000 jobs. Overall, goods producing industries are not that big a source of jobs in this country, just 17.442 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 20,000 workers, followed by a loss of 13,000 among the large sized firms while the medium sized goods producing firms dropped 12,000 workers in the month. The goods producing sector is made up of Manufacturing, Construction and Mining.
The construction industry was again bearing the brunt of the pain, on balance issuing 28,000 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 2.297 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 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.
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 Down, Too
Manufacturing had been a bright spot in this recovery, but in September factory jobs fell for the second month in a row, falling by 17,000 on top of a decline of 2,000 in August. 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 down mining jobs separately, but given the overall decline in goods producing jobs, and the drops in construction and manufacturing we can surmise that the number of mining jobs was unchanged on the month.
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.
Services Make Modest Gains
The service sector is far larger, accounting for 89.507 million jobs or 83.7% of the private sector total. It added 6,000 jobs in September. Of those, 6,000 were added by small service firms, while medium-sized firms dropped 2,000 and large service firms gained 2,000. However, far more people are employed by small service firms, (41.891 million) than by either medium sized firms (33.560 million) or by large sized firms (14.056 million). Thus, relative to the size of overall employment, large-sized service firms were doing as well as small-sized firms.
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.
Jobs Not Covered by ADP
The Federal Government is not through laying off census workers, and that alone will likely depress total employment in August by 80,000 workers or so. The good news is that September should be the last month of mass census layoffs (there is almost nobody left but the permanent staff). State and local governments have been under severe fiscal strain and are likely to be laying off people, as well.
The recent passage of a 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 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.
Disappointing Report
This was clearly a disappointing report, but the disappointment is tempered somewhat by the upward revision to the August numbers. We need to be adding large numbers of private sector jobs, not losing them.
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 bit 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 11.6 months worth of supply on the market in August at the current sales rate for existing homes. With the exception of July, that is the highest on record (i.e. higher than at any point 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. Well, at least historically that is how we have tended to come out of recessions. That just is not happening this time around.
Where Is the Alternative?
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 skill-sets 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.
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