Employment survey sees strong gains

The report from Automatic Data Processing showed that private-sector hiring was stronger than expected in October.

By Zacks.com Nov 2, 2011 2:42PM

The Automatic Data Processing (ADP) employment survey was stronger than expected in October, showing that private sector employment rose by 110,000 -- above consensus expectations for a 100,000 increase.

In addition, the September numbers were revised up to a gain of 116,000 jobs from the initial report of a 91,000 gain.

On average, the ADP report does a fairly good job of predicting the private sector totals that the U.S. Bureau of Labor Statistics reports the following Friday, although in any given month it can be off substantially. The ADP report is prone to fairly large errors in both directions. Last month it was a bit too pessimistic, particularly before the revision, since the BLS private sector job gains were 137,000.

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If confirmed by the BLS on Friday, the numbers would indicate that the economy continues to wallow along in a pseudo-recovery: growing, but not growing fast enough for anybody to really feel much change. However, it would not indicate a renewed downturn.

Over time, the ADP numbers do tend to align with the BLS numbers. There can, however, be substantial differences between the two reports on a month-to-month basis.

Small businesses (defined as fewer than 50 employees) added 58,000 jobs in the month. Medium-sized firms (between 50 and 499 employees) gained 53,000 jobs while large firms with 500 or more employees lost 1,000 jobs.

Large businesses are a relatively small share of total employment in the country, accounting for just 16% of the 109 billion private sector jobs. Small business is the largest source of employment at 45%, followed by medium businesses with 39%.

The goods-producing sector -- made up of manufacturing, construction and mining -- lost 4,000 jobs. Goods-producing industries are not a huge source of jobs in this country, contributing just 16.4% to the total. Employment in goods-producing industries tends to be more volatile than in the service sector, and thus the industries have an outsized influence on the overall strength of the job market.

Construction employment was down by 1,000 in October. Since peaking in January 2007, construction jobs have shrunk by a total of 2.1 million. That is almost a third of the total jobs lost in the entire economy since the recession started.

Manufacturing was a bright spot in this recovery, but it started to falter in the fall. It now looks dead in the water, down 8,000 this month. There were 11.7 million manufacturing jobs, or just 10.7% of the overall private sector workforce. With other evidence pointing to an easing of the supply-chain disruptions stemming from the Japanese disaster, this decline is disappointing.

Within the goods-producing sector, medium sized firms were doing the best, gaining 6,000 jobs. Small firms had unchanged employment levels while large firms dropped a total of 10,000 goods-producing jobs.

The service sector is far larger, accounting for 91.2 million jobs or 83.6% of the private sector total. It added 114,000. Of the jobs gained in October, 58,000 were added by small service firms, while medium-sized firms added 47,000 and large service firms added just 9,000.

The ADP report only covers private sector employment, not government jobs at any level, and thus should be compared to the BLS private sector total, not to the BLS headline number. Government employment has been falling consistently over the last two years (except for under the U.S. Census Bureau in 2010), and at the state and local levels that trend is widely expected to continue.

Looking Ahead to Friday's BLS Report

I am expecting about 30,000 public sector layoffs for the month. If the ADP numbers prove accurate, it means that the headline number on Friday is probably going to be around 80,000. That is still weak for even an average month. It is sure not very inspiring coming out of a deep recession.

The consensus is looking for a gain of 85,000 jobs on Friday, with more than all of the gains coming from the private sector. The ADP numbers should not significantly change those expectations.

Report Card: C+

This was a pretty good report -- better than expected -- but only mediocre in an absolute sense. The numbers implied by this report are below the level needed to keep up with population growth and thus bring down the unemployment rate.

If the economy is really starting to turn around, the participation rate must continue to rebound. That would put upward pressure on the unemployment rate even if 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.

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