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The Automatic Data Processing ([url=]ADP[/url]) employment survey was slightly weaker than expected in August. It shows that private sector employment rose by 91,000, below consensus expectations for a 100,000 increase. The July numbers were also revised down slightly to a gain of 109,000 jobs from the initial report of a 114,000 gain.

On average, the ADP report does a fairly good job of predicting the private sector totals that the BLS will report on Friday, although in any given month it can be off substantially. It is prone to fairly large errors in both directions.

If confirmed by the BLS on Friday, it would indicate that the economy continues to wallow along in a pseudo-recovery -- growing, but not growing fast enough for anybody to really feel like it is growing. Certainly the vast army of the unemployed will not feel like things are getting better.

It’s not a great report, but after the very soft data we have been seeing for most of July and August, it is a relief that it is not much worse. 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.

As the chart below shows, the ADP (blue) numbers track the BLS (red) numbers pretty well over time, but the BLS numbers tend to be somewhat more volatile month to month. Also note that in terms of private sector employment, this recovery has been stronger than the last recovery was up until this point, regardless of which number you used.

Breakdown of Results

Small businesses, defined as those with fewer than 50 employees, rose a total of 58,000 jobs in the month. Medium-sized firms, those with between 50 and 499 employees, gained 30,000 jobs while large firms with 500 or more employees added just 3,000 jobs.

Large businesses are a relatively small share of total employment in the country, accounting for just 17.464 million out of a total of 108.849 million private sector jobs in the country (16.0%). Small business is the largest source of employment at 49.325 (45.3%) million, followed by medium businesses at 42.060 million (38.6%).

The goods-producing sector gained a total of 11,000 jobs. Overall, goods-producing industries are not that big a source of jobs in this country, just 17.838 million (16.4%) 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. 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 during the Great Recession.

Construction & Manufacturing

Construction industry employment was up by 7,000 in July. Construction jobs peaked well before overall employment in the country, in January 2007. Since that time, Construction has shrunk employment by a total of 2.128 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. And with the extraordinary weakness in new home sales in recent months, there is very little reason to believe in 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.  Given the weakness in architects' billings, it is a good bet that Commercial construction will continue to slump through the first quarter of 2012.

Public construction projects have helped a bit over the last year or so, but those will be winding down fast as the spending cuts kick in. On the other hand, 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 second half of 2011 story, but it could well start to occur late in 2012.

Manufacturing was a bright spot in this recovery, but it started to falter in the fall. It sort of looks dead in the water now, down 4,000 this month. There were 11.668 million manufacturing jobs, or just 10.7% of the overall private sector workforce.

Some of the recent weakness in manufacturing is probably related to supply chain disruptions stemming from the Japanese disaster. That has been a particular problem in the Auto industry, but it has not been alone in feeling those effects. However, other data of late has indicated that those effects are starting to wear off, so perhaps we will see better manufacturing employment numbers in September.

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 7,000 on the month. Mining also includes oil and gas drilling jobs.

Within the goods-producing sector, small firms were the star -- gaining 9,000 jobs, followed by medium-sized firms which added 3,000 jobs. Large firms, on balance, issued 1,000 pink slips for goods-producing jobs.

Service Sector

The Service sector is far larger, accounting for 91.011 million jobs or 83.6% of the private sector total. It added 80,000. Of the jobs gained in July, 49,000 were added by small service firms, while medium-sized firms added 27,000 and large service firms added just 4,000. Far more people are employed by small service firms, (42.670 million) than by either medium-sized firms (34.293 million) or by large-sized firms (14.048 million).

No Government Sector Read in ADP

The ADP report only covers private sector employment, not government jobs at any level. The two series do tend to move in the same direction, and tend to be closer once all of the revisions are in. Government employment has been falling in recent months, particularly at the state and local level, and that trend is widely expected to continue.

I am expecting about 35,000 public sector layoffs for the month. Thus, if the ADP numbers prove accurate for May, it means that the headline number on Friday is probably going to be around 56,000. That is still weak for even an average month. It is sure not very inspiring coming out of a deep recession.

That level of job growth will not put much of a dent into the vast army of unemployed and underemployed in this country, and depending on changes in the participation rate would be consistent with a rise in the unemployment rate. Still, this report is not consistent with the idea that we are currently entering a new, or double-dip, recession.

It is consistent with more of the same conditions, and those are bad enough for Main Street, but good enough for firms in the S&P 500 to continue to grow their profits, and thus good enough for Wall Street.

GDP in the second quarter only grew at 1.0%. I suspect that most forecasters are rapidly downgrading their forecasts for the third quarter. From the recent data and trends, I suspect that it will also be below 2.0%, not well north of 3.0% as many (including the Fed) were calling for just a month or so ago.

Housing is still a disaster zone. It seems pretty clear that the economy is not growing nearly fast enough to put a serious dent in the vast army of the unemployed, and the even larger reserve force of the underemployed.

Friday's Consensus

The consensus is looking for a gain of 73,000 jobs on Friday in the BLS report, with more than all of the gains coming from the private sector. The ADP numbers should dent those expectations slightly. The consensus is looking for a loss of 37,000 government jobs, mostly at the state and local levels.

The apples-to-apples private sector expectations are for a gain of 110,000 jobs on Friday. State and local governments have been under severe fiscal strain and are likely to be laying off people, and in June, the Federal Government also started to drop headcount. The government layoffs were 39,000 in June.

Compare the graph below (covering the same time period as the first one) to the graph above. Note that coming out of the last recession, State and Local governments were generally adding jobs, rather than consistently laying people off.

No Near-Term Government Help

With the recent debt-ceiling catastrophe avoidance agreement, don’t look for any help to the States from the Federal level. After all, such aid made up about one quarter of the ARRA. Not only is that not going to be renewed, the pressure is on to cut $1 Trillion of Federal Spending over the next decade, and then come up with another $1.5 Trillion of deficit reduction by Thanksgiving.

If you enjoyed the recent circus in Washington, don’t worry, you will get an encore. The odds are pretty high that the “Super Committee" in Congress will deadlock and we will see an automatic $1.2 Trillion in cuts start to kick in with a vengeance in 2013.

In either case, a big portion of those cuts are likely to be in reduced funding to the States and Localities. 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, and the states continue to cut taxes, particularly on businesses.

For the most part, cutting spending at the state and local level will mean laying people off, or cutting take-home pay of public servants. The state and local cutbacks were a major source of “de-stimulus” that offset 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 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. Now the stimulus is all gone, and austerity is taking over. That austerity will slow the economy.

Slowdown = Further Weakness Overall

Further complicating the picture, if private sector employment is starting to falter, then overall incomes will stagnate and those states with income taxes will see revenues weaken again. Assuming people start to spend less when they don’t have jobs, then sales tax revenues will also fall.

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, and that will result in lower assessed values, and hence lower property tax revenues.

Mediocre, but We'll Take It

This was an OK report -- a touch weaker than expected and only mediocre in an absolute sense, but it was not a disaster. The numbers implied by this report are below the level needed to keep up with population growth and thus bring down the unemployment rate.

The unemployment rate has fallen sharply relative to last fall, but a big part of it (not all, but most) was due to a falling civilian participation rate. And if the economy is really starting to turn around, the participation rate is unlikely to continue to fall, and is more likely 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 going down. That might look OK on paper, but would not reflect any improvement in the real world. The civilian participation rate, and the employment to population ratio (aka "the employment rate") are two of the most important numbers to look at when the report comes out on Friday.

All Eyes on Friday

When the big report comes out on Friday, another important thing to look at will be the revisions to the June and July numbers. Early in the year, the revisions had been running large and positive; that was not true in May or June, but was true in July. If we get negative revisions again, that will be another sign that something is seriously amiss in this recovery.

Total employment in July (BLS) was still 6.806 million below the January 2008 peak (and private sector jobs were 6.454 million lower). At a rate of 91,000 new jobs a month, it would take 71 more months from here before we passed the prior private sector employment peak -- in other words, the middle of 2018. Add in a growing population and workforce, and bringing down unemployment to what we thought of as normal before the Great Recession appears to be a glacial process at best.

The graph below shows the path of employment -- both total and private sector -- over the last forty years, along with the unemployment rate (right scale). Note that relative to the last two downturns, the increase in private sector job growth has been relatively strong, though not as strong as following the 1982-'83 recession. But the decline was also much larger.

A Silver Lining?

If there is a silver lining to this very dark cloud, it is that perhaps some people in Washington DC will wake up to the problem (OK, allow me my delusions). The unemployment rate at 9.1% and having been there for such an extended period should be considered a national crisis. It is by far the most pressing economic concern right now.

But the obsession with the short-term budget deficit is doing serious damage to the economy, and with it the lives of millions of people. The Fed is deeply divided, and it does not look like the economy will get much more help on that front anytime soon. This, despite inflation -- especially core inflation -- running at levels that is far below the average level of the last few decades.

People are fretting about the dollar being weak, despite the fact that it is actually very helpful to have a weak currency when you are running massive trade deficits and when unemployment is very high. This economy needs stimulus, not austerity and tight money. Fiscal stimulus would be best, but monetary stimulus in the form of QE3 would also be helpful.

Unfortunately, the best case realistic scenario right now is that Washington does not take aggressive action that hurts the economy. Fortunately, most of the first round of spending cuts are back-end loaded.

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