Great News from ADP: Private Sector Hiring Increased By … 42,000?

Yeesh. The fact that this is actually good news provides a commentary on the current economic environment that may not be particularly welcome. However, it might explain the across-the-board election results from last night better than some other theories, especially given the earlier polling.

With the Bureau of Labor Statistics shuttered for the moment, and with questions about its accuracy and methodology still pending, ADP is about the only national metric we have for the labor market. Today, they reported that the US labor market had its best month since July in their private-sector analysis, but that only amounts to a net increase of 42,000 jobs:

Private sector employment increased by 42,000 jobs in October and pay was up 4.5 percent year-over-year according to the October ADP National Employment Report® produced by ADP Research in collaboration with the Stanford Digital Economy Lab (“Stanford Lab”).

The ADP National Employment Report is an independent measure of the labor market based on the anonymized weekly payroll data of more than 26 million private-sector employees in the United States.ADP’s Pay Insights captures over 15 million individual pay change observations each month. Together, the jobs report and pay insights use ADP’s fine-grained data to provide a representative and high-frequency picture of the private-sector labor market.

“Private employers added jobs in October for the first time since July, but hiring was modest relative to what we reported earlier this year,” said Dr. Nela Richardson, chief economist, ADP. “Meanwhile, pay growth has been largely flat for more than a year, indicating that shifts in supply and demand are balanced.”

Bear in mind that the US population still increases every month, although the outflow of illegal aliens this year likely has put a big dent in that growth. Historically, it takes somewhere between 100,000-125,000 jobs to maintain a labor force participation rate percentage in the low-to-mid sixties. Any figure below that means that job creation is not keeping pace with population growth. That either means a higher percentage of unemployed workers, more retirements for economic purposes than expected, or both. It’s not a good number.

However, as CNBC points out, at least it’s going in the right direction, but only for larger employers:

Payroll growth at private companies turned slightly stronger than expected in October, providing some hope that the labor market isn’t in danger of sinking, ADP reported Wednesday.

Companies added 42,000 jobs for the month, following a decline of 29,000 in September and topping the Dow Jones consensus estimate for a gain of 22,000. A revision for September showed 3,000 fewer jobs lost, the payrolls processing firm said. …

All of the job creation came from companies employing at least 250 workers. That category added 76,000 jobs, while smaller businesses lost 34,000. The trend away from job growth at at small businesses is significant, considering they are responsible for three of every four jobs, ADP chief economist Nela Richardson said.

Watching small businesses lose ground should get the attention of policymakers. The industries that lost jobs are also worrisome for the long-term health of the economy. Manufacturing dropped 3,000, leisure and hospitality another 5,000, while professional and business services lost 15,000. That latter indicates a lack of investment in growth activities. The only good long-term sign among the industries is an increase of 5,000 jobs in construction.  

There is one puzzling signal of hope, however. Wages are still going up in the private sector despite three months of poor results in job creation:

Despite the meager job growth, salaries continued to rise. Year-over-year pay for those staying in their jobs rose 4.5%, the same as in September, while job switchers saw a 6.7% increase, up slightly from a month ago.

That is indeed curious. Wages should go down as fewer jobs appear in the market, unless the labor supply is contracting at the same or greater rate. The outflow of illegal aliens may be causing a significant enough contraction in supply to keep upward pressure on wages, but if that’s the case, one would also expect to see more jobs on the market as workers exit. Wage growth can be a lagging indicator, but job creation has been stalling for months now. 

What caused the improvement in October? The likely answer would be action from the Federal Reserve, which finally cut its benchmark rate by a quarter point last month. If so, expect a lot of pressure on Jerome Powell and the board to take more significant action, which at least a couple of the board members wanted last month. The job market clearly wants less expensive credit before investing in job-creating activities, and with inflation still largely under control, it can afford to wait out Powell and the Fed — and probably don’t have much choice anyway. Right now, small businesses can’t afford job-creating activities at all, and only large corporations with husbanded capital had the ability to react to the incremental cut last month. 

Finally, this may well explain why Democrats had a field day yesterday, albeit in states they largely control anyway. The economic signals aren’t all bad, but they’re not showing a roaring economy yet either, which was the expectation set by Donald Trump and the GOP. They had better concentrate on growth-oriented policies in regulatory and tax arenas, and push Powell and the Fed to adopt more pro-growth monetary policies, before the midterms get much closer. 

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