Automatic Data Processing (ADP) reported that the economy gained a total of 55,000 private sector jobs in May, and the job gains it saw for April were revised sharply higher to 65,000 from 35,000. This is the fourth month in a row that ADP has reported job gains, but the numbers are modest relative to the size of the pool of unemployed. The job gains in May were below consensus expectations of 60,000 new private sector jobs.
ADP should be in a good position to gauge the strength of the job market, because it is the largest processor of payroll checks in the country by a very wide margin. However, while over time the ADP numbers generally have a good correlation with the “official” private-sector jobs gains and losses reported by the BLS (whose numbers are due out tomorrow morning), in recent months the ADP numbers have been very wide of the mark.
For example, in April, the BLS reported private sector job gains of 225,000. While ADP’s revision of its numbers closes the gap somewhat, it is still a huge chasm. On the other hand, the numbers that ADP is coming up with seem more consistent with the weekly initial unemployment claims (see: Initial Jobless Claims Down, Still High) data than do the BLS numbers. The BLS numbers seem more consistent with what we have seen from sources like the ISM surveys (see: ISM Survey Down Less Than Expected; ISM service data is due out later today).
BLS Numbers Will Include Census Jobs
It is important to remember that the ADP number includes just private-sector jobs. The expectations for tomorrow’s BLS data include a huge number of temporary census jobs. The consensus expectations for tomorrow are for a gain of 500,000 jobs including the census, which would be higher than all but 15 months since 1939!
However, those jobs will only last a few months. That is better than being unemployed, but those jobs will not have the same impact on the economy as permanent private-sector (or even permanent public-sector) jobs would have. On the other hand, public sector employment also includes state and local workers such as teachers, police and firefighters, and those job totals are under pressure from huge budget gaps at the state and local levels. But for the ARRA, hundreds of thousands of those jobs would have already been lost, and now that funding is starting to dry up.
Breakdown by Business Size
All sizes of businesses reported employment gains. Small businesses (less than 50 workers) hired a net total of 13,000 people in May. Mid-sized businesses (50 to 499 workers) hired a total of 39,000. Big business was the laggard, with gains of just 3,000.
However, if we adjust for the size of the total workforce employed by the different sized firms, the gains by mid-sized firms look more impressive (on a relative basis) and the large firms don’t look quite so bad. The increase in mid-sized businesses was an increase of 0.095% of the mid-sized business payroll, while the increase was just 0.027% for small businesses and 0.017% for big business.
Services vs. Goods Producing
More than all the job gains came from the service sector of the economy, which added a total of 78,000 jobs in May. Of those, small and medium-sized firms each added 37,000 jobs and large firms added just 4,000. The goods producing sector, on the other hand, lost a total of 23,000 jobs in May due to a decline of 24,000 in small goods-producing firms. Medium-sized firms added 2,000 goods producing jobs, while there were net layoffs of 1,000 at big goods producing firms.
The relative strength of services is in seemingly direct contradiction to the ISM data, which has been running stronger for the manufacturing index, and particularly the employment sub-index, than it has for the non-manufacturing index. Partly that is because manufacturing is just a subset — albeit a very large subset — of goods-producing jobs and industries.
Goods producing also include construction (and mining). ADP reported a gain of 15,000 jobs in May, although it does not break out those numbers by firm size. In contrast, construction lost a total of 41,000 more jobs in May on top of 42,000 jobs lost in April.
This marks the 35th straight month that ADP has reported declines in construction employment. One begins to wonder if there are any construction jobs left in the country, or if it has declined to the state of blacksmiths after the introduction of the automobile. The decline in construction jobs is certainly plausible, but it does seem to be contradicted by the rise in construction spending of 2.7% in April (and the upward revision to a 0.4% increase for March).
Unemployment Still a Huge Factor
While the fact that the economy is once again gaining jobs is very good news, and news that was really unexpected a few months ago, it is clear that unemployment is still the single most important problem facing the economy. This is not the time to let up on economic stimulus, either fiscal or monetary.
There is still a huge amount of slack in the economy and no sign at all of inflation. Thus any talk of raising the Fed funds rate is extremely premature, and indeed the Fed should probably be doing more to increase the supply of money and credit. The most direct way of doing so would be to further expand the size of its balance sheet by buying Treasury notes. Another thing it could do is cut the interest rate it pays banks to hold on to their excess reserves to entice them to actually make loans to businesses.
It is also premature to obsess too much over the budget deficit. Putting more people back to work will result in higher tax revenues — not only federal income taxes, but people will spend what they make when working, thus increasing state sales tax receipts.
Of course over the long run we do need to restore some fiscal discipline. However, the long-run deficits really come down to two words: Health Care. The recently passed reform bill did a far better job at expanding coverage than it did in controlling costs, although there were a few good cost control items in the reform that will put a small dent in the long-run deficit, at least according to the non-partisan Congressional Budget Office scoring, but we really need more than a small dent.
More immediately, over the next few months, hundreds of thousands — if not millions — of people who have been out of work for a very long time now will lose their last lifeline in the form of extended unemployment benefits. They will be left with no income at all, and have probably already depleted most of their other financial resources.
That will mean a lot fewer customers for Wal-Mart (WMT) and many more people deciding to stop paying their mortgages and just living rent- and mortgage-free until the sheriff eventually kicks them out.
In no state in the nation is the average time between people stopping payment and eviction less than 300 days (see this New York Times article). The “rent free” option will be the only one left to those people. However, it will result in even greater losses at Fannie Mae (FNM) and Freddie Mac (FRE), and since those are both 80% owned by the government, it will mean more losses for taxpayers.
In other words, getting religion on cutting spending right now is mostly a form of self-flagellation. It confuses pain with virtue, and will be about as effective in curing the long-run budget problems as the flagellants of the Middle Ages were in stopping the Black Death. The big difference is that the flagellants were inflicting pain on themselves to be virtuous — the deficit hawks will be inflicting pain on the long-term unemployed, who are already hurting.
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.
