The Automatic Data Processing (ADP) employment survey was much stronger than expected in June. It shows that private sector employment rose by 157,000, far above consensus expectations for a 60,000 increase. That marks a nice acceleration from the 36,000 jobs added (as estimated by ADP) in May. The May numbers were revised down from a gain of 38,000 jobs.

This is an encouraging report if confirmed by the BLS non-farm payroll report tomorrow. It is not a great report in an absolute sense, but it is far better than expected, and offers reasons for hope after last month’s dismal showing. In May, ADP was more downbeat than the BLS, which reported a total of 54,000 new private sector jobs, but it proved to be closer than the consensus at the time.

There can, however, be substantial differences between the two reports on a month-to-month basis. Thus it is not a slam dunk that the Friday report will be better than now expected, but that would be the way to bet. 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 February ADP was almost spot on with a forecast of 217,000 private sector jobs added and reported a gain of 222,000 private sector jobs. However that was subsequently revised up by the BLS to a gain of 240,000.

In other words, the ADP numbers are generally in the ballpark, but there is still considerable room for the numbers on Friday to be significantly different. As the chart below shows, the ADP (blue) numbers track the BLS (red) numbers pretty well over time, but the BLS numbers tend to be somewhat more volatile month to month.

Results by Size of Firm

Small businesses, defined as those with fewer than 50 employees, rose a total of 88,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 59,000 jobs while large firms with 500 or more employees added 10,000 jobs.

Large businesses are a relatively small share of total employment in the country, accounting for just 17.456 million out of a total of 108.677 million private sector jobs in the country (16.1%). Small business is the largest source of employment at 49.224 (45.3%) million, followed by medium businesses at 41.997 million (38.6%).

Goods Producing Jobs

The goods producing sector, gained a total of 27,000 jobs. Overall goods producing industries are not that big a source of jobs in this country, just 17.834 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

Construction industry employment was down by 4,000 in June. Construction jobs peaked well before overall employment in the country, in January 2007. Over that period construction employment has shrunk by a total of 2.124 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. 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

Manufacturing has been a bright spot in this recovery, but it faltered last fall. It looks like it is getting back on track with a gain of 24,000 jobs in June, more than offsetting the 9,000 lost in May. There were 11.677 million manufacturing jobs, or just 10.7% of the overall private sector workforce.

Some of the May weakness in manufacturing is probably related to supply chain disruptions stemming from the Japanese disaster. That has been a particular problem in the Auto industry, but it has not been alone in feeling those effects. 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 7,000 on the month.

Within the goods producing sector, most of the gains came from the small firms which added 12,000 jobs. The medium-sized goods producing firms gained 10,000 jobs for the month. Large goods producing firms lagged behind with a gain of just 5,000 jobs. However, the large goods producing group only employ about half as many people as medium sized ones, so on a relative basis, large firms were contributing as much as medium sized ones were.

Service Sector

The Service sector is far larger, accounting for 90.843 million jobs or 83.6% of the private sector total. It added 130,000, up from adding just 48,000 jobs in May. Of the jobs gained in June, 76,000 were added by small service firms, while medium sized firms added 49,000 and large service firms added just 5,000. Far more people are employed by small service firms, (42.577 million) than by either medium sized firms (34.228 million) or by large sized firms (14.038 million).

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. Government employment has been falling in recent months, particularly at the state and local level, and that trend is widely expected to continue.

An Improvement, Still Tepid

Thus if the ADP numbers prove accurate for May, it means that the headline number on Friday is probably going to be above 100,000. That is still pretty weak for even an average month. It is sure not very inspiring coming out of a deep recession.

That level of job growth will not put much of a dent into the vast army of unemployed and underemployed in this country. Recent signals on the economy have been mixed, generally better than in May, but not as robust as earlier in the year. This report falls into that category.

GDP in the first quarter only grew at 1.9%, and will probably come in at that level or lower in the second quarter. Initial claims for unemployment insurance have been once again consistently running over the 400,000 level.

Housing is still a disaster zone. It seems pretty clear that the economy is not growing nearly fast enough to put a serious dent in the vast army of the unemployed, and the even larger reserve force of the underemployed.

Looking Ahead to Friday

The consensus is looking for a gain of 80,000 jobs on Friday, with more than all of the gains coming from the private sector. The ADP numbers should make a significant change in those expectations. The consensus is looking for a loss of 30,000 government jobs, mostly at the State and Local levels.

The apples-to-apples private sector expectations are for a gain of 110,000 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 29,000 in April. It would not shock me if the State and Local losses are greater than expected again this month, and/or if the April lay-off numbers were revised substantially higher.

Government No Longer Helping

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 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, 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. Further complicating the picture, if private sector employment is starting to falter, then overall incomes will stagnate, and those states with income taxes will see revenues weaken again.

Assuming people start to spend less when they don’t have jobs, then sales tax revenues will also fall. 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.

Better than May, Worse than April

This was an OK report — much better than expected, but only mediocre in an absolute sense. It was much better than May, but well below what we saw in March or April. Those job gains were only slightly above the level needed to keep up with the growth in the labor force to begin with. The numbers implied by this report are below that level.

The unemployment rate has fallen sharply relative to last fall, 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.

With the numbers implied from this report, a continued drop in the participation rate would be the only way to keep the unemployment rate will go down. That might look OK on paper, but would not reflect any improvement in the real world. The civilian participation rate, and the employment to population ratio (aka the employment rate) are two of the most important numbers to look at when the report comes out on Friday.

BLS is the Biggie

When the big report comes out on Friday, another important thing to look at will be the revisions to the May and April numbers. In recent months the revisions have been running large and positive, but that was not true in May. If we get negative revisions again, that will be another sign that something is seriously amiss in this recovery.

Total employment in April was still 6.90 million below the January 2008 peak (and private sector jobs were 6.68 million lower). At a rate of 157,000 new jobs a month, it would take 43 more months from here before we passed the prior private sector employment peak, in other words, late in 2015. 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.

While the pace we were on in the previous few months was glacial, May was like the speed of continental drift. The graph below shows the path of employment, both total and private sector over the last thirty years, along with the unemployment rate (right scale).

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.

If there is a silver lining to this very dark cloud, it is that perhaps some people in Washington DC will wake up to the problem. The unemployment rate at 9.1% and having been there for such an extended period should be considered a national crisis. It is by far the most pressing economic concern right now.

However, on the monetary policy front, the discussion is all about how to unwind the stimulus from QE2 and of fears of inflation. This despite inflation — especially core inflation — that is running at levels that is far below the average level of the last few decades.

People are fretting about the dollar being weak, despite the fact that it is actually very helpful to have a weak currency when you are running massive trade deficits and have very high unemployment. This economy needs stimulus, not austerity and tight money.
 
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