The Automatic Data Processing (ADP) employment survey was a little weaker than expected in March. It shows that private sector employment rose by 201,000, slightly below consensus expectations for a 210,000 increase. The gains, however, were widespread, and if confirmed by the BLS on Friday, would still be a solid report.

In February, ADP was almost right on the money, but that came after a few months when its estimates were well off the mark. In January, it was far too optimistic, showing a gain of 187,000, and then the BLS only reported a gain in private sector jobs of 50,000 (later revised up to 68,000). 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 167,000) from the private sector.

Prior to the last three months, for most of 2010, ADP was being too conservative. However, the ADP numbers are also subject to revision, and the February gains were revised down to 208,000 from 217,000.

Results by Size of Business

Small businesses, defined as those with fewer than 50 employees, rose a total of 102,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 82,000 jobs while large firms with 500 or more employees added 17,000 jobs.

Large businesses are a relatively small share of total employment in the country, accounting for just 17.453 million out of a total of 108.292 million private sector jobs in the country (16.1%). Small business is the largest source of employment at 49.022 (45.3%) million, followed by medium businesses at 41.817 million (38.6%).

Results by Sector

The goods producing sector added a total of 37,000 jobs. Overall goods producing industries are not that big a source of jobs in this country, just 17.776 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 5,000 in December. Construction jobs peaked well before overall employment in the country, in January 2007. Over that period, the industry has shrunk employment by a total of 2.126 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 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 any time 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 37,000 jobs in March on top of a gain of 20,000 jobs in February. There were 11.644 million manufacturing jobs, or just 10.8% 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 5,000 on the month. Within the goods producing sector, most of the gains came from the medium sized firms which added 21,000 jobs. Large firms added 3,000 while the small goods producing firms gained 13,000 jobs for the month.

Service Sector Jobs

The Service sector is far larger, accounting for 90.516 million jobs or 83.6% of the private sector total.  It added 164,000 jobs in March. Of those, 89,000 were added by small service firms, while medium sized firms added 61,000 and large service firms gained 14,000. Far more people are employed by small service firms, (42.400 million) than by either medium sized firms (34.094 million) or by large sized firms (14.022 million). 

A Look at Revisions

The ADP report only covers private sector employment, not government jobs at any level. 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 downward revision to the ADP January numbers to be both interesting and discouraging.

It was pretty close to the “official” BLS number of 222,000 with its initial read of 217,000, but slightly conservative, and now it is being revised lower, away from the “real” BLS estimate for the month. The BLS numbers are often revised significantly, and in recent months the direction of the revisions has been upward. The downward revision in the ADP February number throws doubt on if that will happen again on Friday.

ADP is not the only indicator that the employment situation is improving. 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. Prior to seeing the downward ADP revision for February, my expectation was to see the BLS February numbers revised up in a significant way.

Now I’m not quite as sure. The BLS’ 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.

Predicting Friday’s BLS Report

The consensus is looking for a gain of 185,000 jobs on Friday, with more than all of the gains coming from the private sector. The ADP numbers should not make a significant change in those expectations. The consensus is looking for a loss of 18,000 government jobs, mostly at the State and Local levels. The apples-to-apples private sector expectations are for a gain of 203,000 jobs on Friday.

State and Local governments have been under severe fiscal strain and are likely to be laying off people. The State and Local layoffs were much higher than expected in February, coming in at 30,000 rather than the 12,000 that were expected. It would not shock me if the State and Local losses are greater than expected again this month. Some governors seem almost gleeful at the prospect of laying off State and Local employees these days.

Employment & Politics

With a stalemate going on between the GOP house and the Democratic Senate and White House, don’t look for any help to the States from the Federal level. After all, such aid made up about one quarter of the ARRA or stimulus plan that the GOP criticized during 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, and the states continue to cut taxes, particularly on businesses.

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.

Report In-Line with Expectations

This was an encouraging report, but in line with expectations. 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 recently, actually the steepest two-month fall in the unemployment rate since 1958 in December and January, 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.

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 during the winter. When the big report comes out on Friday, look at the revisions to the January and February numbers. In recent months the revisions have been running large and positive.

If this report is confirmed by the BLS numbers, a gain of 201,000 private sector 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 Bush Presidency.

Since this jobs recovery started in February 2010, we have only been averaging 127,000 new private sector, and 106,000 total new jobs per month, so a private sector total of 201,000 would represent a substantial acceleration.

On the other hand, total employment in February was still 7.48 million below the January 2008 peak (and private sector jobs were 7.31 million lower). At a rate of 201,000 new jobs a month, it would take 36 more months from here before we passed the prior private sector employment peak — in other words March of 2014. 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 30 years. Note that relative to the last two downturns, the increase in private sector job growth has been relatively strong, but not as strong as following the 1982-83 recession, but that the decline was also much larger.


 
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