ADP Employment Report

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Brighter Jobs Market

This is a very hectic week, but today’s ADP jobs report is worth noting: the private sector added another 170,000 jobs in January, down from December’s 292,000, but decent nonetheless. This means we have had twenty-four straight months of job creation and confirms what other statistics are telling us: the recovery is well under way, but remains at a steady rather than dramatic pace.

While this is all good news, we should not get carried away. The economy is laden with under used resources, both labor and capital, and so we are leaving a tremendous amount of wealth on the table each month.

The details of the report suggest that there is a stirring of growth at the lower levels of the economy. The vast majority of the new jobs were in small or medium sized businesses, and the service sector is the primary driver of growth – 152,000 of the total were in services, while only 18,000 were in manufacturing.

Also of interest, because it gives us insight into consumer confidence outside of the usual surveys, is that there has been a steady increase in the number of workers quitting their jobs voluntarily in order to take a better job. This supports the notion that the tone of the labor market has improved and that, slowly but surely, workers are shaking off the deep despondency of the crisis. Hopefully we can maintain this trend since it will have a compounding effect by spreading confidence throughout the economy.

Lastly: one of the much discussed aspects of this crisis has been the way in which the collapse in property values contributed to the sticky labor market. Many workers were not able to move to new regions of the country to take a new job because they could not sell their home without taking a loss. This added to the problems all too evident in the job market and has made the recovery much more difficult. The news that more and more people are changing jobs of their own volition suggests that they are able or willing to make a move despite the impediment of a potential housing issue. Perhaps we are seeing a general loosening of conditions and thus the beginnings of a stronger trend.

Perhaps.

We will have to watch theses kinds of statistics carefully over the next few months in order to tease such information from the data.

Still the jobs market is much better than it was. And that’s worth noting.

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Hiring On The Rise?

Just days after I issued my forecast for a rather dull 2012 we read that the US private sector hired 325,000 people in December. This is according to ADP the payroll processing company that keeps an eye on such things. This is a noteworthy jump in activity by any standard and deserves to be commented on. If this number holds up tomorrow when we hear from the government in its total payroll data, then we all should breath better: the economy is showing signs of life.

But.

ADP has a track record of being a rotten forecaster at year end. Its seasonal adjusting is a little whacky. So the past couple of years its December figures have not been borne out either by the government numbers, or by subsequent evidence. So be warned: this may be a false dawn.

In order to root out support for the optimistic interpretation of ADP’s report we should look for possible corroborating trends.

New claims for unemployment assistance have also been trending down. Today’s report has them at 372,000 last week, compared with 387,000 the week before. Bear in mind that two week’s ago we saw a mild upward blip in claims, otherwise the recent trend has been steady, if unspectacular, progress. The tone in the job market is clearly improving, the data all are pointing in the right direction, the problem is that progress is still insufficient to break the back of our high unemployment levels any time soon. The gains are real but incremental. We need claims in the 325,000 a week range before we can think in terms of a healthy job market.

Beyond jobs we have evidence of improvement in manufacturing. Yesterday’s look at factory orders showed more strengthening. Orders were up 1.8%, right in line with expectations and much improved over November’s -0.4% dip. Couple this with Tuesday’s brighter Institute of Supply Management’s report on business conditions – their index of activity ticked up nicely to 53.9% in December from 52.7% in November – and the outlook seems better as we enter the new year. With both orders and general activity rising we can infer that the recent improvement in hiring will continue.

So, notwithstanding ADP’s seasonal issues, I think we can accept that things are on the rise. Probably at a less rapid pace than suggested by the ADP report, but nonetheless at a higher rate than the second half of last year.

Does this alter my forecast?

No.

I will stick to the view that the recent improvement has all the makings of a phase that will ebb when we butt up against the slow down being forced onto Europe by its 1930’s style policies. Add in the glaring fact that wages are stuck which means that even if people have a job they don’t have oodles of spare cash to go out and spend. Especially if they are still trying to pay down debt.

It is this debt liquidation that still dominates all other trends. There will come a moment when households reach a level of debt they feel comfortable with. I doubt they are there yet. Although US debt levels are down considerably they are not yet at sustainable levels in an economy that seems unable to generate many well paying jobs, and where asset prices – both stocks and houses – are still highly uncertain.

While this process continues we cannot expect consumption to pick up rapidly. So businesses will still be faced by stagnant sales and will only be able to boost activity in stores by repeating profit eroding discount programs. Thus, while overall activity may look better, the underlying issues remain sufficiently negative to drag growth back into the 2.0% range I have been predicting, rather than accelerating it above 3.0% where we need it to be to bring us back to full employment and a feeling of full recovery.

This is why I suggest we should be a little leery of the ADP figures. Let’s se what tomorrow brings.

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Unemployment: Better? Or Worse?

Here we go.

The immediate reaction to this morning’s announcement that the US unemployment rate dropped to 8.6%, its lowest level since 2009, is one of excitement and relief. On the surface, which is where the mainstream media seems to dwell permanently, things look as if a corner has been turned. Those who are politically inclined will interpret this as a good sign for Obama, and Republican supporters will be glumly hankering for the good old days when they could hang a rotten jobs market around his neck.

This is, of course, nonsense.

I didn’t comment yesterday about the weekly report on new claims for unemployment assistance because I wanted to do so in the context of today’s jobs report. The combined picture is not that good. Certainly nowhere near as good as the headline fall in the unemployment rate.

Let’s step back to yesterday.

The new claims data was disappointing. By itself it spoke to stagnation not progress. At 402,000 it was up 6,000 on the prior week, and was well above the widely expected forecast of around 390,000. I have said repeatedly that any number around 400,000 is just not good. The economy has a monthly inflow of new workers so it needs to absorb somewhere around 125,000 people every month just to stay even. It is only new jobs in excess of 125,000 that go towards reducing overall unemployment. Similarly, under ‘normal’ conditions the turnover within the economy causes about 300,000 new claims each week, so yesterday’s news that claims edged up back above 400,000 cannot be interpreted positively at all. The move was in the wrong direction, and the level is still way too high.

Which is why I waited to see today’s data.

Beneath the headline we find a much less optimistic picture. The economy added only 120,000 new jobs, with the private sector adding 140,000 and the government shedding 20,000. The private sector gain was broadly in line with the ADP data we saw earlier in the week, so there was no shock there. It was not overly strong, but not that weak either. However there is still weakness in the public sector. The loss of jobs in the government sector has now reached a total of 600,000 over the last two years as state and local governments struggle to cut their deficits. That loss of local jobs – which is concentrated in education, fire, and police departments – has taken a great deal of steam from state economies and contributed to the stagnation we see at the national level. We should remember that the effect of the federal stimulus back in 2009 was heavily muted by enormous austerity measures introduced at the local level, so these job reports provide tangible evidence of the contradictory nature of government policies over recent years: the federal level has tried to aid expansion; the local level has induced contraction.

Also lost in the details is the remarkable exit from the workforce of 315,000 workers last month. They gave up looking for jobs so they are no longer counted in the calculation of the unemployment rate. That loss alone accounts for most of the improvement in the headline rate, and is, naturally, not an improvement at all. That we have such a large number of people simply giving up on their job search at this stage in the economic cycle is a sign of a deep underlying ailment. It does not augur well for the future if more and more workers opt for early retirement, or a life of enforced leisure. We need them producing stuff, earning wages, and spending or saving. We don’t need them living off savings or sitting around doing nothing. Plus, we should be seeing the exact opposite trend: in a vibrant economy people are induced to re-enter the workforce to make some extra cash. Obviously that opportunity isn’t there. Far from it, the outlook seems to be adding discouragement rather than encouragement.

Still, all is not lost.

The numbers were at least positive in the general sense. Plus they add to the growing trend of mildly positive numbers we have seen over the last three or four months. The economy has managed to get past the slight lull we saw in the early summer – recall all those fears of a double-dip recession – and is back on a steady but unspectacular crawl to safety.

The politicians will spin today’s report in a variety of ways. Don’t fall for it. To put things in context: we need to add more than 250,000 jobs a month to cut the unemployment rate to the pre-crisis level within the next few years. At the current pace we won’t get there for a decade. And, parenthetically, that pre-crisis level was around 6.0% and was not so good by historic standards. So, despite the glitzy headline decline in the unemployment rate, the news this week was definitely weak.

Better? or Worse?

Better, but only by the thinnest of margins.

Not good enough by a very wide margin.

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Good News: Jobless Claims Drop

We should all acknowledge that today’s report is good news. New claims for unemployment assistance dropped again, to 368,000, which is 20,000 lower than last week. This is the best level they have been since may 2008. Better yet, the four week average is also down to mid-2008 levels at 388,500, which tells us that today’s report is not an aberration.

Claims have now dropped about 25% since last summer, and when we couple that advance with the modest rise in hiring and the reduction in layoffs, we can see the labor market has improved substantially.

Phew.

But.

Not enough. The crisis has left us with an enormous residue of damage yet to be cleared up. And the most obvious aspect of that damage remains the painful level of unemployment, especially long term unemployment.

We will get a better look at the job market tomorrow when the government reports it numbers, but earlier this week ADP reported that private payrolls gained 217,000 jobs last month. There has been a bit of a divergence between the ADP and government figures recently, largely because ADP counts payroll numbers and not those who were paid. If you are on a payroll somewhere, but received no wage, ADP reports you as employed. The government reports only those who get a wage. Apparently businesses are keeping people on their payroll lists and not paying them. Thus the difference between the two data series.

Setting that kind of statistical quirk aside, the numbers are improving. Nowhere near enough. But let’s bask in the glow for at least a day.

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Payrolls Rise

Well they should.

Today’s ADP report suggests that the US private sector added about 187,000 jobs in January. That’s the good news. The disappointment is that this is well down from the 247,000 added in December. Plus that December number was, itself, revised downwards from its original heady 297,000. So all in all, good but could be better.

What is interesting, is that much of the gain in January came in small business where 97,000 new jobs were added. The largest businesses only added 11,000. This is something of a turn about from the earlier months of the recovery when most of the gain was in large companies while their smaller counterparts struggled to expand. Back then we were told that the restriction on small business growth was absence of credit – does this inversion of job growth tell us that credit is flowing more freely? Or is it simply that expectations about the future have changed sufficiently for small business owners to take on more workers? The truth will only emerge when we see more bank data, and, I suspect, it sits squarely in the middle.

Now we wait for the government report on Friday which will give us totals including government employment. Since most government agencies and state level organizations are mired in austerity movements I suspect that the news Friday will be less upbeat: overall payroll growth is probably lagging behind the private sector. We may even see a blip upwards in the unemployment rate since the level of new jobs seems not to be keeping up with workforce growth. Unfortunately there is no neat way to fit the data together, so we are definitely in “wait and see” mode.

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