The Automatic Data Processing (ADP) employment survey was a bit better than expected in October. It shows that private sector employment rose by 43,000 last month, above consensus expectations for a 23,000 increase. Also, the September numbers were revised to a loss of just 2,000 jobs rather than the original estimate of a loss of 39,000 jobs.
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 evidence of an economy that is growing, but at a very slow pace.
While it is nice to see a better-than-expected increase — and so far this year the ADP report has consistently been more pessimistic than the BLS report (due out Friday morning) — it is not even close to the level we need to make a serious dent in the vast army of the unemployed. It is not really even enough to keep up with the growth of the labor force due to population growth.
Results by Category
Small businesses, defined as those with fewer than 50 employees, rose a total of 21,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 24,000 jobs. Large firms, with 500 or more employees, dropped 2,000 jobs.
Large businesses are a relatively small share of total employment in the country, accounting for just 17.502 million out of a total of 107.056 million private sector jobs in the country. Small business is the largest source of employment at 48.298 million, followed by medium businesses at 41.256 million.
Jobs were lost from the goods producing sector, which fell a total of 34,000 jobs. Overall goods producing industries are not that big a source of jobs in this country — just 17.424 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 16,000 workers, followed by a loss of 11,000 among the large-sized firms, while the medium-sized goods producing firms dropped 7,000 workers in the month. The goods producing sector is made up of Manufacturing, Construction and Mining.
Good Producing: Construction
The construction industry was again bearing the brunt of the pain, on balance issuing 23,000 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 2.313 million. That is more than one fourth of the total jobs 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 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 this 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
Manufacturing had been a bright spot in this recovery, but in October factory jobs fell for the third month in a row, down 12,000 on top of a decline of 17,000 in September. 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 the number of mining jobs was up 1,000 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.
The service sector is far larger than goods producing, accounting for 89.632 million jobs or 83.7% of the private sector total. It added 77,000 jobs in September. Of those, 37,000 were added by small-service firms, while medium-sized firms added 31,000 and large service firms gained 9,000. Far more people are employed by small-service firms, (41.950 million) than by either medium-sized firms (33.610 million) or by large firms (14.056 million).
Prelude to BLS Report
The ADP report only covers private sector employment, not government jobs at any level. The ADP report has also been consistently more downbeat than the official BLS numbers so far this year, but the two series do tend to move in the same direction. The consensus is looking for a gain of 60,000 jobs on Friday, with all of the gains coming from the private sector, and government employment unchanged.
Given the recent relationship between the ADP numbers and the BLS numbers, don’t be shocked if the BLS shows an increase in private sector jobs of about 100,000 or so. That would be a nice positive surprise, but still not enough to make a serious dent in the unemployment rate, particularly if the participation rate starts to rise.
The Federal government is through laying off census workers, so they will no longer be a factor. State and Local governments have been under severe fiscal strain and are likely to be laying people off.
How the New Congress Changes Things
The new GOP majority in the House of Representatives is going to be less inclined to provide financial assistance to the State and Local governments. After all, such aid made up about one third of the ARRA (or “stimulus plan”) that they criticized in the election. And 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. 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.
Somewhat Encouraging Report
This was a somewhat encouraging report. We need to be adding large numbers of private sector jobs, and 43,000 a month is not nearly enough, but at least we are not losing them like we did last month. 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 big 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 then come on 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 10.7 months worth of supply on the market in September at the current sales rate for existing homes. That was roughly the same months of supply we saw 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.
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. Unfortunately, we are likely to see cuts in such spending going forward, not increases.
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.
More about Zacks Strategic Investor >>
AUTOMATIC DATA (ADP): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
Zacks Investment Research
