Automatic Data Processing, the largest payroll processing firm in the nation, reported this morning that the nation lost 20,000 private sector jobs in February, which is the smallest number by its count since the recession began all the way back in December of 2007. This is a relatively tasty appetizer to the jobs data main course that comes out in Friday morning.
However, the revision to the January data to a loss of 60,000 jobs from their original estimate of 22,000 leaves a bit of a bad aftertaste. The report points out that due to differences in methodologies, the ADP report is less affected by the blizzards in the Northeast than the BLS report will be. In other words, brace yourself for an ugly looking jobs report on Friday, but then a big rebound in the March report.
ADP reported that medium-sized businesses — those with 50 or more workers but less than 500 — showed the best performance, increasing payrolls by 8,000, nearly reversing the 10,000 positions those firms eliminated in January. Small businesses continue to be a drag on the overall jobs picture, dropping 20,000 jobs in February after a 26,000 decline in January. Big business lost 10,000 jobs on the month, which is less than half the number they dropped in January.
Breaking the Numbers Down
Goods-producing firms lost 37,000 jobs, but of those, manufacturing actually gained 3,000 jobs, which implies that construction jobs continue to be demolished at a rapid rate. Service sector jobs increased by 17,000 in February.
These numbers are somewhat contradicted by the ISM data that was released on Monday for Manufacturing and this morning for Services. The ISM data implies a much bigger increase in manufacturing jobs and a continued, if smaller, decline in service sector jobs.
Within the goods producing sector, it is the small businesses that are shrinking payrolls the most, with a drop of 25,000 on top of a 33,000 decline in January. It is nice to see fewer layoffs than the month before, but we are still talking about 25,000 more people without a paycheck from that relatively small part of the overall economy.
In February, the total number of people employed by small goods-producing firms was only 6.491 million. Large goods producing firms employed 7,000 fewer than in January, and in January employed 19,000 fewer than in December. Those jobs really are getting rare as the total in January was just 3.458 million, so on a percentage basis the decline was almost, but not quite, as bad as among small goods producing firms. Medium-sized goods-producing firms dropped 5,000 workers after a 18,000 decline in January to bring the total to 7.674 million.
The Service sector is a far larger part of the economy, employing a total of 89.1 million, while the goods producing sector only provides a total of 17.6 million jobs in the private sector. Thus while the 17,000 jobs gained in January in the service sector is nice, especially coming on top of 10,000 gained in January, it represents a very small percentage increase.
By size, the small and medium-sized firms are doing much better than the big firms in the service sector. Small service firms added 7,000 jobs in the month, matching the January increase. Medium-sized firms accelerated their hiring to 13,000 from 8,000. Large firms, on the other hand, cut 3,000 positions on the month after a 5,000 decline in January.
What Is the Takeaway?
While the report was exactly in line with expectations, and has been showing improvement consistently over the last year, at least in terms of few job losses, it is still reporting people on-balance losing their jobs. Production lost because people are out of work is lost forever, and the economy is operating far below its potential, by as much as $1 trillion a year right now, as shown in the graph below (from here).
While unemployment benefits were finally extended last night, the extension in the emergency benefits only lasts another month. So a month from now, look for Senator Jim Bunning to throw another bean-ball at the heads of the unfortunate six-plus million people who have been out of work now for more than six months (and the MLB Hall of Fame doesn’t think Pete Rose has the moral fiber to be inducted).
While extended unemployment benefits do help people and also help low-end retailers like Wal-Mart (WMT) and Big Lots (BIG), since without the benefits those people would have no income at all, they are not a great long-term solution. There is work to be done in the country, and people available to do the work — we need to find a way to put the two together. If that means for the short term we run a bigger budget deficit, so be it.
If the nation is running that far below potential then it is not generating the income that then becomes tax revenues. The bulk of the increase in the deficit over the last two years has come because tax revenues have plunged, not because of a huge income in spending — other than the sort of automatic stabilizers, such as unemployment benefits, that rise during economic downturns.
The View Beyond Employment Numbers
That sort of gap between actual and potential GDP means that inflation will not be a problem for the foreseeable future. This means that the Fed is probably moving too early to remove its accommodative stance, and probably should continue to expand its balance sheet rather than reduce it.
To raise the Fed funds rate before actual GDP got back much closer to potential GDP would be a mistake of epic proportions. While given the inherent lags in monetary policy, they probably should not wait until the gap is fully closed but should start to move when the gap shrinks to about $300 billion and is clearly closing.
That is a long way away from where we are now. To close the gap that far, real GDP growth would have to be above 6% for all of 2010, or conversely we would have to have more than two years of real growth of 3% to close the gap, which would imply no increase in the Fed Funds rate until the start of 2012.
That however, is my prescription, not my forecast. Still, I am not expecting to see an increase in the Fed Funds rate until at least early 2011.
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.
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