By Dirk van Dijk, CFA
The Automatic Data Processing (ADP) employment survey was FAR better than expected in December. It shows that private sector employment rose by 297,000 in October, almost triple consensus expectations for a 100,000 increase. The November numbers were revised slightly lower to a gain of 92,000 jobs rather than the original estimate of a gain of 93,000 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 not only growing, but is accelerating very nicely.
For most of 2010, the ADP report has consistently been more pessimistic than the Bureau of Labor Statistics (BLS) report -- due out Friday morning -- although that was not the case in November. Some of this huge pop could be a statistical catch-up to the BLS numbers, but certainly not all of it. This is the sort of the level we need to make a serious dent in the vast army of the unemployed.
Small businesses, defined as those with fewer than 50 employees rose a total of 117,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 114,000 jobs while large firms with 500 or more employees added 36,000 jobs. Large businesses are a relatively small share of total employment in the country, accounting for just 17.544 million out of a total of 107.512 million private sector jobs in the country. Small business is the largest source of employment at 48.499 million, followed by medium businesses at 41.469 million.
Goods Producing
The goods producing sector added a total of 27,000 jobs. Overall, goods producing industries are not that big a source of jobs in this country, just 17.489 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.
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
Construction industry employment was unchanged in December. That is actually good news as it is the first time since June of 2007 that the industry has not shed employees. Over that period has shrunk employment by a total of 2.306 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 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 anytime 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 and Homebuilding
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 23,000 jobs in December. There were 11.525 million manufacturing jobs in December, or just 10.7% 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 4,000 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 9,000, while things were still tough among the small goods-producing firms, which lost a net of 3,000 jobs for 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.
Service Sector
The Service sector is far larger, accounting for 90.023 million jobs or 83.7% of the private sector total. It added 270,000 jobs in December. Of those, 120,000 were added by small service firms, while medium-sized firms added 123,000 and large service firms gained 27,000. Far more people are employed by small service firms, (42.139 million) than by either medium sized firms (33.778 million) or by large sized firms (14.106 million).
ADP = A Read on Private Sector
The ADP report only covers private-sector employment, not government jobs at any level. The ADP report has also been consistently more downbeat (with the exception of November) 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 135,000 jobs on Friday, with more than all of the gains coming from the private sector.
The consensus is looking for a loss of 10,000 government jobs, mostly at the State and Local levels. Earlier in 2010, the government job totals were first greatly inflated, but then depressed by the hiring and then laying off of the Census workers. That is no longer a factor. State and Local governments have been under severe fiscal strain and are likely to be laying off people. Look for that trend to continue and probably accelerate, given the political changes in November.
Political Sea Changes
The new GOP majority in the House 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 (Stimulus Plan), which had been heavily 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. 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 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. That will result in lower assessed values, and hence lower property tax revenues.
In Summation
This was an extremely encouraging report. This is the sort of job growth that should actually bring down the unemployment rate. It is not going to be a one-for-one sort of thing, since as people see more jobs being added to the economy, the labor force participation rate is likely to start to rebound.
In light of this report, and positive news from the Challenger Gray and Christmas (see below), it would be shocking if the BLS report was anywhere as low as the current consensus of 135,000 jobs gained. There has been a steady acceleration in job creation according to the ADP data, rising from an addition of 29,000 jobs in September to 79,000 in October to 92,000 in November.
The December number is a quantum leap higher. This report also makes it likely that the sharp drop in initial jobless claims reported last week to 388,000 was not just a seasonally induced fluke (or at least not all of it).
Challenger Gray Report
The good news was also confirmed by the outplacement firm Challenger Gray. They found:
After reaching a seven-year high in 2009, downsizing activity in 2010 fell to its lowest level since 1997, as employers announced plans to eliminate 529,973 positions. The year came to a close with the lowest monthly job-cut total since 2000. Planned layoffs totaled 32,004 in December, down 34 percent from 48,711 in November, according to the 2010 year-end job-cut report released Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc. December job cuts were 29 percent lower than the same month a year ago when 45,094 cuts were announced. December surpassed August (34,768) as the lowest job-cut month of the year. It was the lowest monthly total since June 2000 when employers cut 17,241 jobs.
The real outlier among the recent employment reports was the November BLS report, which showed and increase of just 39,000 total jobs, and 50,000 private sector jobs. Don’t be surprised if the November numbers are revised much higher when the December report comes out on Friday.
New Prediction
In light of these reports, I am now penciling in a gain of 250,000 jobs for the December report, but relatively minor decline in the unemployment rate to 9.6%, where it was sitting for three months prior to the November rise to 9.8%. There are a lot of other very important numbers in that report, and I will have a very full analysis of the numbers up by Friday afternoon (a separate post will give the highlights early in the day).
I had been relatively upbeat about the prospects for the economy in 2011 (see Fearless Forecasts for 2011), but if the numbers from these reports are confirmed by the BLS numbers on Friday, things could be much better than I have been anticipating. I’m not yet ready to change my overall forecasts -- this is just one month’s worth of data, after all -- but it looks like the risks are to the upside in terms of economic growth and job creation in 2011. That is the sort of risk I like.
Disclosure: None
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