ADP Sees 84,000 Jobs Lost - Analyst Blog

This morning, Automatic Data Processing (ADP), the largest processor of private sector payrolls, reported that the economy lost 84,000 more private sector jobs in December. This was somewhat worse than the consensus expectations of 75,000 lost jobs.

It was, however, a substantial improvement from their estimate that the economy lost 145,000 jobs in November, which was actually revised down from an initial estimate of 169,000 lost jobs. It was also the smallest job loss by ADP’s calculations since March 2008.

While ADP should be in a position to know, its report is often wildly off the mark, and usually too pessimistic in predicting what the “official BLS" (Bureau of Labor Statistics) numbers will be (to be released Friday morning). After all, according to the BLS, the economy only lost 11,000 jobs in November.

Both the ADP and the BLS numbers are subject to revisions, and the BLS has already said that there will be big downward revisions for the earlier part of the recession (through March 2009) when they do their benchmark revisions in March. Those are expected to total about 840,000, which would tend to bring the official BLS numbers closer to the ADP ones, at least for 2008 and early 2009.

Goods: Not So Good

Going in to the details, ADP saw a decline of 96,000 jobs in the goods producing sector, including 43,000 in manufacturing. This does not square with the ISM numbers that came out on Monday, where the employment index rose to 52.0 from 50.8 and has been above the 50 mark, which divides expansion from contraction, for 3 straight months now.

Construction is the other major goods producing industry, and it lost 52,000 more jobs in December -- its 35th straight month of decline. Since its peak, the construction industry has lost 1.777 million jobs.

While there are some signs that residential construction is coming back, but from truly historic depths, commercial construction still has a long way to fall. The country is littered with empty strip malls and office buildings, so why would businesses want to build more of them?

ADP did see a gain in service sector jobs of 12,000, the biggest gain for that group since January 2008.

Size Doesn’t Matter

By size of firm, the losses were widespread, with small firms (< 50 employees) dropping 25,000 positions, medium sized firms (50 to 499 employees) also down 25,000 and large firms (500 or more employees) dropping 34,000 jobs. The small-firm group appeared to be responsible for most (11,000) of the service sector’s gains, but that was offset by 36,000 jobs lost by goods producing firms.

All in all, it was a slightly disappointing report, but the focus is still going to be on the Big Kahuna that comes out on Friday morning -- the BLS numbers. There, the consensus is for total jobs to be unchanged; that sure would be a nice improvement over December 2008, when the economy dropped 681,000 jobs.

However, even if the economy does start to add jobs, it is going to take awhile before it brings the unemployment rate down. Discouraged workers who feel that it is not even worth their while to look for work since the employment situation is so bad are not even currently considered to be in the labor force. They are neither employed nor unemployed, according to the official figures. As the economy starts to create some new jobs, they will come flooding back into the workforce, and the first step on their journey will be to be unemployed.

What to Watch on Friday

Thus, there will be far more to consider on Friday than just the unemployment rate (U-3) and the total number of jobs gained or lost. Pay attention to the civilian participation rate, and the percentage of the population that is employed (what I like to call the "employment rate"). That is never going to be just 100 minus the unemployment rate (unless we seriously get rid of child labor laws and put all those lazy 2-year-olds to work). However, it has been in a pretty steep downtrend since 2000, with only a minor rise from 2004 to 2007.

Another thing to look for on Friday is the average workweek. When business picks up, the first thing they are going to do is bring the people they had on part time status back to full time. Next, look at the number of temp jobs, since the second thing a business will do is call Kelly Services (KELYA or Manpower (MAN. Only when they are convinced that the upturn in the economy is for real will they want to hire new full-time employees, especially if they also provide benefits.

The final thing to be on the look out for is the duration of unemployment numbers. This recession has been by far the worst in history when it comes to the length of time people stay out of work once they get laid off. Long-term unemployment is a very different experience than just being laid off for a few weeks, both financially and emotionally.

The last few months have actually seen a decline in the number of short-term unemployed, which is a sign that problem is not so much with people getting laid off at very high rates -- the number of people who have been out of work for over six months has been mushrooming. That means that there are very few new jobs being created (the employment report numbers are the net of jobs lost versus new jobs created). It would be a very good sign if we saw the median length of unemployment fall from its astoundingly high level of 20.1 weeks it hit in November.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

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