The Automatic Data Processing (ADP) employment survey was better than expected in February. It shows that private sector employment rose by 217,000, well above consensus expectations for a 165,000 increase.

In January it was far too optimistic, showing a gain of 187,000 (now revised up to 189,000) and then the BLS only reported a gain in private sector jobs of 50,000. In December, ADP was even further off the mark and reported a gain of 297,000 private sector jobs and the BLS only reported a gain of 113,000 (later revised up to 139,000) from the private sector.

Prior to the last three months, for most of 2010, ADP was being too conservative.  Given the big misses in the last two months, one has to wonder if the ADP algorithm is broken. If it isn’t, then this is good news. I just don’t want to get my hopes up for a great report on Friday based on these numbers. Fool me once…

Results by Business Size

Small businesses, defined as those with fewer than 50 employees, rose a total of 100,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 104,000 jobs, while large firms with 500 or more employees added 13,000 jobs.

Large businesses are a relatively small share of total employment in the country, accounting for just 17.436 million out of a total of 108.099 million private sector jobs (16.1%). Small business is the largest source of employment at 48.923 (45.3%) million, followed by medium businesses at 41.741 million (38.6%).

Goods Producing Jobs

The goods producing sector, added a total of 15,000 jobs. Overall, goods producing industries are not that big a source of jobs in this country — just 17.726 million (16.4%) 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 industry employment was down by 9,000 in December. Construction jobs peaked well before overall employment in the country, in January 2007. Over that period employment has shrunk by a total of 2.130 million jobs. That is more than one fourth of the total 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 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 20,000 jobs in February. There were 11.605 million manufacturing jobs, 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 up 4,000 on the month.

Within the goods producing sector, most of the gains came from the medium sized firms which added 17,000 jobs. Large firms lost 5,000 while the small goods-producing firms gained 3,000 jobs for the month.

Service Sector Results

The Service sector is far larger, accounting for 90.373 million jobs or 83.6% of the private sector total. It added 202,000 jobs in February.  Of those, 97,000 were added by small service firms, while medium sized firms added 87,000 and large service firms gained 18,000. Far more people are employed by small service firms, (42.319 million) than by either medium sized firms (34.043 million) or by large sized firms (14.011 million).

ADP vs. BLS

The ADP report only covers private sector employment, not government jobs at any level. The ADP report has been more optimistic than the BLS over the last three months, but for most of 2010 it was too pessimistic (provided one takes the BLS establishment survey to be the real number).

The two series do tend to move in the same direction, and tend to be closer once all of the revisions are in. In that regard, I find the small upward revision to the ADP January numbers to be both interesting and encouraging. It is moving further away from the real BLS number, not closer. The BLS numbers are often revised significantly.

The establishment survey was sort of the odd man out, data-point wise, for employment in January. It was not just the ADP number that would have led one to expect a much better number than a 50,000 private sector gain. For example the ISM surveys have been very strong, including the employment sub-index, and initial claims for unemployment insurance have broken to the downside.

I really would not be surprised at all to see the BLS January numbers revised up in a significant way. The BLS’s own household survey has (the part from which the unemployment rate is derived) has also been showing far larger job gains than the employment survey in recent months.

The consensus is looking for a gain of 183,000 jobs on Friday, with more than all of the gains coming from the private sector. The consensus is looking for a loss of 12,000 government jobs, mostly at the State and Local levels. The apples-to-apples private sector expectations are for a gain of 195,000 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.

Political Factors

Some governors seem almost gleeful at the prospect of laying off State and Local employees these days. Many of the incoming governors and state legislatures are downright hostile towards public sector employees, particularly if they are represented by a union, and are likely to use job cuts as a weapon to force public sector unions to accept pay cuts and pension reductions to help balance strained State and Local budgets.

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 (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, or cutting take-home pay of public servants. 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.

Encouraging, but Tempered Enthusiasm

This was an encouraging report, but my enthusiasm is tempered by the big misses in the last two months. 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 start to put a dent in the vast army of the unemployed.

The unemployment rate has fallen sharply in the last two months — actually the steepest two-month fall in the unemployment rate since 1958 — but a big part of it (not all, but a big part) was due to a falling civilian 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. That would put upward pressure on the unemployment rate even as the economy starts to do better in job creation.

Jobs Getting Back on Track?

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 probably was a factor in holding down job gains in the last two months. When the big report comes out on Friday, look at the revisions to the December and January numbers.

In recent months, the revisions have been running large and positive. If this report is confirmed by the BLS numbers, a gain of 217,000 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 GW 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 217,000 would represent a substantial acceleration.

On the other hand, total employment in January was still 7.28 million below the December 2007 peak (and private sector jobs were 7.11 million lower). At a rate of 217,000 new jobs a month, it would take 33 more months from here before we passed the prior private sector employment peak, in other words December of 2013.

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 twenty years.


 
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